UNIFORM COMPUTER INFORMATION

TRANSACTIONS ACT

(Last Revisions or Amendments Completed Year 2002)

drafted by the

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

and by it

APPROVED AND RECOMMENDED FOR ENACTMENT

IN ALL THE STATES

at its

ANNUAL CONFERENCE

MEETING IN ITS ONE-HUNDRED-AND-ELEVENTH YEAR

TUCSON, ARIZONA

JULY 26 - AUGUST 2, 2002

WITH PREFATORY NOTE AND COMMENTS

Copyright © 2002

By

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

October 15, 2002

UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT

(Amended 2000, 2002)

The Committee that acted for the National Conference of Commissioners on Uniform State Laws in preparing the Uniform Computer Information Transactions Act is as follows:

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

JOHN A. CHANIN, 715 S. Washington Street, Apartment B13, Alexandria, VA 22314

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

PATRICIA BRUMFIELD FRY, University of Missouri School of Law, Missouri Avenue &Conley Avenue, Columbia, MO 65211

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

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

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

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

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

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

K. KING BURNETT, P.O. Box 910, Salisbury, MD 21803, President

BARRY H. EVENCHICK, 354 Eisenhower Pkwy., Livingston, NJ 07039, Division Chair

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

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

WILLIAM H. HENNING, University of Missouri-Columbia, School of Law, 313 Hulston Hall,

Columbia, MO 65211, Executive Director

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

Copies of this Act may be obtained from:

Prefatory Note 1

PART 1
GENERAL PROVISIONS

[SUBPART A. SHORT TITLE AND DEFINITIONS]

SECTION 101. SHORT TITLE. 4

SECTION 102. DEFINITIONS. 4

[SUBPART B. GENERAL SCOPE AND TERMS]

SECTION 103. SCOPE; EXCLUSIONS. 29

SECTION 104. CONSUMER PROTECTION LAW GOVERNS. 40

SECTION 105. RELATION TO FEDERAL LAW; FUNDAMENTAL PUBLIC POLICY;

LAWFUL PUBLIC COMMENT; TRANSACTIONS SUBJECT TO OTHER STATE LAW. 43

SECTION 106. RULES OF CONSTRUCTION. 47

SECTION 107. LEGAL RECOGNITION OF ELECTRONIC RECORD AND

AUTHENTICATION; USE OF ELECTRONIC AGENTS. 49

SECTION 108. PROOF AND EFFECT OF AUTHENTICATION. 50

SECTION 109. CHOICE OF LAW. 51

SECTION 110. CONTRACTUAL CHOICE OF FORUM. 54

SECTION 111. UNCONSCIONABLE CONTRACT OR TERM. 56

SECTION 112. MANIFESTING ASSENT. 57

SECTION 113. OPPORTUNITY TO REVIEW. 61

SECTION 114. PRETRANSACTION DISCLOSURES IN INTERNET-TYPE

TRANSACTIONS. 64

SECTION 115. VARIATION BY AGREEMENT. 65

SECTION 116. SUPPLEMENTAL PRINCIPLES; GOOD FAITH; COMMERCIAL

PRACTICE. 67

SECTION 117. DECISION FOR COURT; LEGAL CONSEQUENCES; REASONABLE TIME;

REASON TO KNOW. 69

SECTION 118. TERMS RELATING TO INTEROPERABILITY AND REVERSE

ENGINEERING. 71

PART 2
FORMATION AND TERMS

[SUBPART A. FORMATION OF CONTRACT]

SECTION 201. FORMAL REQUIREMENTS. 73

SECTION 202. FORMATION IN GENERAL. 77

SECTION 203. OFFER AND ACCEPTANCE IN GENERAL. 80

SECTION 204. ACCEPTANCE WITH VARYING TERMS. 81

SECTION 205. CONDITIONAL OFFER OR ACCEPTANCE. 83

SECTION 206. OFFER AND ACCEPTANCE: ELECTRONIC AGENTS. 85

SECTION 207. FORMATION: RELEASES OF INFORMATIONAL RIGHTS. 86

[SUBPART B. TERMS OF RECORDS]

SECTION 208. ADOPTING TERMS OF RECORDS. 87

SECTION 209. MASS-MARKET LICENSE. 90

SECTION 210. TERMS OF CONTRACT FORMED BY CONDUCT. 95

[SUBPART C. ELECTRONIC CONTRACTS: GENERALLY]

SECTION 211. EFFICACY AND COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE. 97

SECTION 212. DETERMINING ATTRIBUTION. 98

SECTION 213. ELECTRONIC ERROR: CONSUMER DEFENSES. 100

SECTION 214. ELECTRONIC MESSAGE: WHEN EFFECTIVE; EFFECT OF ACKNOWLEDGMENT. 102

[SUBPART D. IDEA AND INFORMATION SUBMISSIONS]

SECTION 215. IDEA OR INFORMATION SUBMISSION. 103

PART 3
CONSTRUCTION

[SUBPART A. GENERAL]

SECTION 301. PAROL OR EXTRINSIC EVIDENCE. 105

SECTION 302. PRACTICAL CONSTRUCTION. 107

SECTION 303. MODIFICATION AND RESCISSION. 109

SECTION 304. CONTINUING CONTRACTUAL TERMS. 111

SECTION 305. TERMS TO BE SPECIFIED. 113

SECTION 306. PERFORMANCE UNDER OPEN TERMS. 114

[SUBPART B. INTERPRETATION]

SECTION 307. INTERPRETATION AND REQUIREMENTS FOR GRANT. 115

SECTION 308. AGREEMENT FOR PERFORMANCE TO PARTY'S SATISFACTION. 118

PART 4
WARRANTIES

SECTION 401. WARRANTY AND OBLIGATIONS CONCERNING NONINTERFERENCE AND

NONINFRINGEMENT. 119

SECTION 402. EXPRESS WARRANTY. 124

SECTION 403. IMPLIED WARRANTY: MERCHANTABILITY OF COMPUTER PROGRAM. 128

SECTION 404. IMPLIED WARRANTY: INFORMATIONAL CONTENT. 131

SECTION 405. IMPLIED WARRANTY: LICENSEE'S PURPOSE; SYSTEM INTEGRATION. 134

SECTION 406. DISCLAIMER OR MODIFICATION OF WARRANTY. 136

SECTION 407. MODIFICATION OF COMPUTER PROGRAM. 140

SECTION 408. CUMULATION AND CONFLICT OF WARRANTIES. 141

SECTION 409. THIRD-PARTY BENEFICIARIES OF WARRANTY. 142

SECTION 410. NO IMPLIED WARRANTIES FOR FREE SOFTWARE. 144

PART 5
TRANSFER OF INTERESTS AND RIGHTS

[SUBPART A. OWNERSHIP AND TRANSFERS]

SECTION 501. OWNERSHIP OF INFORMATIONAL RIGHTS. 145

SECTION 502. TITLE TO COPY. 146

SECTION 503. TRANSFER OF CONTRACTUAL INTEREST. 148

SECTION 504. EFFECT OF TRANSFER OF CONTRACTUAL INTEREST. 152

SECTION 505. PERFORMANCE BY DELEGATE; SUBCONTRACT. 154

SECTION 506. TRANSFER BY LICENSEE. 155

[SUBPART B. FINANCING ARRANGEMENTS]

SECTION 507. FINANCING IF FINANCIER DOES NOT BECOME LICENSEE. 156

SECTION 508. FINANCE LICENSES. 157

SECTION 509. FINANCING ARRANGEMENTS: OBLIGATIONS IRREVOCABLE. 159

SECTION 510. FINANCING ARRANGEMENTS: REMEDIES OR ENFORCEMENT. 160

SECTION 511. FINANCING ARRANGEMENTS: EFFECT ON LICENSOR'S RIGHTS. 162

PART 6
PERFORMANCE

[SUBPART A. GENERAL]163

SECTION 601. PERFORMANCE OF CONTRACT IN GENERAL. 163

SECTION 602. LICENSOR'S OBLIGATIONS TO ENABLE USE. 166

SECTION 603. SUBMISSIONS OF INFORMATION TO SATISFACTION OF PARTY. 167

SECTION 604. IMMEDIATELY COMPLETED PERFORMANCE. 168

SECTION 605. ELECTRONIC REGULATION OF PERFORMANCE. 169

[SUBPART B. PERFORMANCE IN DELIVERY OF COPIES]

SECTION 606. COPY: DELIVERY; TENDER OF DELIVERY. 173

SECTION 607. COPY: PERFORMANCE RELATED TO DELIVERY; PAYMENT. 175

SECTION 608. COPY: RIGHT TO INSPECT; PAYMENT BEFORE INSPECTION. 176

SECTION 609. COPY: WHEN ACCEPTANCE OCCURS. 178

SECTION 610. COPY: EFFECT OF ACCEPTANCE; BURDEN OF ESTABLISHING; NOTICE OF CLAIMS. 180

[SUBPART C. SPECIAL TYPES OF CONTRACTS]

SECTION 611. ACCESS CONTRACTS. 181

SECTION 612. CORRECTION AND SUPPORT CONTRACTS. 184

SECTION 613. CONTRACTS INVOLVING PUBLISHERS, DEALERS, AND END USERS. 186

[SUBPART D. LOSS AND IMPOSSIBILITY]

SECTION 614. RISK OF LOSS OF COPY. 188

SECTION 615. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS. 190

[SUBPART E. TERMINATION]

SECTION 616. TERMINATION: SURVIVAL OF OBLIGATIONS. 192

SECTION 617. NOTICE OF TERMINATION.. 193

SECTION 618. TERMINATION: ENFORCEMENT. 195

PART 7
BREACH OF CONTRACT

[SUBPART A. GENERAL]

SECTION 701. BREACH OF CONTRACT; MATERIAL BREACH. 197

SECTION 702. WAIVER OF REMEDY FOR BREACH OF CONTRACT. 199

SECTION 703. CURE OF BREACH OF CONTRACT. 201

[SUBPART B. DEFECTIVE COPIES]

SECTION 704. COPY: REFUSAL OF DEFECTIVE TENDER. 204

SECTION 705. COPY: CONTRACT WITH PREVIOUS VESTED GRANT OF RIGHTS. 206

SECTION 706. COPY: DUTIES UPON RIGHTFUL REFUSAL. 207

SECTION 707. COPY: REVOCATION OF ACCEPTANCE. 210

[SUBPART C. REPUDIATION AND ASSURANCES]

SECTION 708. ADEQUATE ASSURANCE OF PERFORMANCE. 211

SECTION 709. ANTICIPATORY REPUDIATION. 212

SECTION 710. RETRACTION OF ANTICIPATORY REPUDIATION. 213

PART 8
REMEDIES

[SUBPART A. GENERAL]

SECTION 801. REMEDIES IN GENERAL. 214

SECTION 802. CANCELLATION. 215

SECTION 803. CONTRACTUAL MODIFICATION OF REMEDY. 218

SECTION 804. LIQUIDATION OF DAMAGES. 221

SECTION 805. LIMITATION OF ACTIONS. 222

SECTION 806. REMEDIES FOR FRAUD. 224

[SUBPART B. DAMAGES]

SECTION 807. MEASUREMENT OF DAMAGES IN GENERAL. 225

SECTION 808. LICENSOR'S DAMAGES. 228

SECTION 809. LICENSEE'S DAMAGES. 231

SECTION 810. RECOUPMENT. 234

[SUBPART C. REMEDIES RELATED TO PERFORMANCE]

SECTION 811. SPECIFIC PERFORMANCE. 235

SECTION 812. COMPLETING PERFORMANCE. 236

SECTION 813. CONTINUING USE. 237

SECTION 814. DISCONTINUING ACCESS. 238

SECTION 815. RIGHT TO POSSESSION AND TO PREVENT USE. 239

SECTION 816. LIMITATIONS ON ELECTRONIC SELF-HELP. 241

PART 9

MISCELLANEOUS PROVISIONS

SECTION 901. SEVERABILITY. 242

SECTION 902. EFFECTIVE DATE. 242

SECTION 903. REPEALS. 242

SECTION 904. PREVIOUS RIGHTS AND TRANSACTIONS. 243

SECTION 905. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL

COMMERCE ACT. 243

UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT

"A commercial contract code for computer information transactions"

Prefatory Note

Once land ownership and agrarian production were primary sources of wealth and income in our economy, and contracts for the exchange of horses and grain dominated the commercial landscape. Following the industrial revolution, manufactured goods assumed center stage. In the 1930s Llewellyn recognized that this change required revisions to the law of sales, so that its rules were relevant to the new economy. The result was UCC Article 2. Despite initially strong resistance, Article 2 won universal acceptance, for it reflected the reality of economic change and its implications for contract law.

Our economy has experienced another fundamental change, with information products and services now driving increased productivity and growth. Accompanying this change is a widely diverse and rich array of methods for distributing and tailoring digital information to the modern marketplace. Contracts underlie both the creation and distribution of such information. However, legal rules that are not relevant to commercial practice or that are uncertain in application inhibit contracting or raise transaction costs. UCITA was drafted in response to this fundamental economic change and need for clarity in the law.

Article 2 served as both a model and a point of departure for UCITA. Like Article 2, UCITA covers a variety of transactions, many of which take place solely between merchants. Article 2 governs sales of jet planes as well as toasters, not to mention the large-scale acquisition of jet and toaster parts. UCITA governs access by Fortune 500 businesses to sophisticated databases as well as distribution of software to the general public; it also covers custom software development and the acquisition of various rights in multimedia products.

Both UCITA and Article 2 are based upon the principle of freedom of contract: with limited exceptions, the terms and effect of a contract can be varied by agreement. Most provisions of both statutes are default rules, applicable only if the parties do not specify some other rule. Although one could try to fashion a contract code that regulates comprehensively rather than permitting such flexibility, it is hard to imagine such an approach being compatible with a vibrant market economy. Even if one succeeded in making the regulations stick, the effect would be to hinder rather than facilitate commerce. On the other hand, as noted, without certain default rules, contracting and thus legal rights remain unclear.

To be sure, not every term of a contract should be enforced. UCITA follows Article 2 in providing a standard of unconscionability for courts to employ in policing contract terms. UCITA goes beyond Article 2 in authorizing courts to strike down over-reaching language that conflicts with fundamental public policy. It also goes beyond Article 2 and other existing law in furthering licensee interests by prohibiting electronic self-help under this statute (Section 816) and by excluding enforcement of "no-reverse-engineering" clauses in some cases. See Section 118. Compare Bowers v. Baystate Technologies, Inc., 302 F.3d 1334 (Fed Cir. 2002).

UCITA provides that common law doctrines such as fraud and duress remain effective and that applicableconsumer protection law governs. UCITA does not alter competition or antitrust law. It does not change trade secret law, intellectual property law, or substantive consumer law. It deals only with contracts.

As Llewellyn recognized in drafting Article 2, contract law must be tailored to the type of transactions that it covers. Just as a body of law based on images of the sale of horses was not relevant a half century ago to sales of manufactured goods, so today a body of law based on images of the sale of manufactured goods ill fits licenses and other transactions in computer information. Rules based on an antiquated view of the transactional world do not give coherent guidance to courts or to transacting parties.

UCITA is the first uniform contract law designed to deal specifically with the new information economy. Transactions in computer information involve different expectations, different industry practices, and different policies from transactions in goods. For example, in a sale of goods, the buyer owns what it buys and has exclusive rights in that subject matter (e.g., the toaster that has been purchased). In contrast, someone that acquires a copy of computer information may or may not own that copy, but in any case rarely obtains all rights associated with the information. See DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999), cert. den. 528 U.S. 923 (1999). What rights are acquired or withheld depends on what the contract says. This point only is implicit in Article 2 for goods such as books; UCITA makes it explicit for the information economy where, unlike in the case of a book, the contract (license) is the product. See Specht v. Netscape Communications Corp., - F.3d -, 2002 WL 31166784 n. 13 (Fed. Cir. 2002); SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9th Cir. 1989).

Licensing is one way in which computer information is tailored to the information marketplace. Courts have enforced contract terms that, among other things:

Such contract terms have helped to create the wondrous array of products and services that characterizes our modern economy. Whether specific terms are appropriate for a given transaction or set of parties is fundamentally a marketplace issue.

As noted, in computer information transactions, license terms often define the product. A software product may be provided in the same form in two transactions, but in one case the user is authorized to make 100,000 copies and in the other merely to use a single copy at home. The value of the transaction inheres not in the tangible medium (if, indeed, any is used), but rather in the license grant terms. UCITA does not require that computer information products and services be licensed; it covers sales as well. But UCITA provides a coherent contract law framework for analyzing a license, which has been the dominant contractual framework for commerce in computer information.

Up to this point, a complex mix of common law and Article 2 has governed computer information transactions. The common law is frequently difficult to ascertain, and it varies widely among states. In addition, differences in the legal norms that have developed in different areas of information practice are producing unpredictable results as those areas converge. Article 2, while uniform, does not properly apply to many issues involved in transactions in computer information, and when it applies, it often does not provide appropriate guidance because of differences in subject matter and transactional frameworks.

The need for a coherent, uniform body of law has never been greater. Revolutions in telecommunications and computer technology have made geography increasingly irrelevant to modern commerce. The Internet enables small firms as well as large ones to provide products and services throughout the country and around the world. Even as online systems have altered how many information transactions are performed, however, fundamental issues associated with contracting online remain unanswered. A modern contract law must give guidance on those issues. Failure to do so does not foster but rather impedes commerce in computer information.

The liberating promise of technology cannot be fully realized unless there is predictability in the legal rules that govern such transactions. This is the need that UCITA addresses. It clarifies and sets forth uniform legal principles applicable to computer information transactions. UCITA is a statute for our time.

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Computer Information Transactions Act.

SECTION 102. DEFINITIONS.

(a) [General definitions.] In this [Act]:

(1) "Access contract" means a contract to obtain by electronic means access to, or information from, an information processing system of another person, or the equivalent of such access.

(2) "Access material" means any information or material, such as a document, address, or access code, that is necessary to obtain authorized access to information or control or possession of a copy.

(3) "Aggrieved party" means a party entitled to a remedy for breach of contract.

(4) "Agreement" means the bargain of the parties in fact as found in their language or by implication from other circumstances, including course of performance, course of dealing, and usage of trade as provided in this [Act].

(5) "Attribution procedure" means a procedure to verify that an electronic authentication, display, message, record, or performance is that of a particular person or to detect changes or errors in information. The term includes a procedure that requires the use of algorithms or other codes, identifying words or numbers, encryption, or callback or other acknowledgment.

(6) "Authenticate" means:

(A) to sign; or

(B) with the intent to sign a record, otherwise to execute or adopt an electronic symbol, sound, message, or process referring to, attached to, included in, or logically associated or linked with, that record.

(7) "Automated transaction" means a transaction in which a contract is formed in whole or part by electronic actions of one or both parties which are not previously reviewed by an individual in the ordinary course.

(8) "Cancellation" means the ending of a contract by a party because of breach of contract by another party.

(9) "Computer" means an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions.

(10) "Computer information" means information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer. The term includes a copy of the information and any documentation or packaging associated with the copy.

(11) "Computer information transaction" means an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information. The term includes a support contract under Section 612. The term does not include a transaction merely because the parties' agreement provides that their communications about the transaction will be in the form of computer information.

(12) "Computer program" means a set of statements or instructions to be used directly or indirectly in a computer to bring about a certain result. The term does not include separately identifiable informational content.

(13) "Consequential damages" resulting from breach of contract includes (i) any loss resulting from general or particular requirements and needs of which the breaching party at the time of contracting had reason to know and which could not reasonably be prevented and (ii) any injury to an individual or damage to property other than the subject matter of the transaction proximately resulting from breach of warranty. The term does not include direct damages or incidental damages.

(14) "Conspicuous", with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. A term in an electronic record intended to evoke a response by an electronic agent is conspicuous if it is presented in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of the record by an individual. Conspicuous terms include the following:

(A) with respect to a person:

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

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

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

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

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

(16) "Consumer contract" means a contract between a merchant licensor and a consumer.

(17) "Contract" means the total legal obligation resulting from the parties' agreement as affected by this [Act] and other applicable law.

(18) "Contract fee" means the price, fee, rent, or royalty payable in a contract under this [Act] or any part of the amount payable.

(19) "Contractual use term" means an enforceable term that defines or limits the use, disclosure of, or access to licensed information or informational rights, including a term that defines the scope of a license.

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

(21) "Course of dealing" means a sequence of previous conduct between the parties to a particular transaction which establishes a common basis of understanding for interpreting their expressions and other conduct.

(22) "Course of performance" means repeated performances, under a contract that involves repeated occasions for performance, which are accepted or acquiesced in without objection by a party having knowledge of the nature of the performance and an opportunity to object to it.

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

(24) "Delivery", with respect to a copy, means the voluntary physical or electronic transfer of possession or control.

(25) "Direct damages" means compensation for losses measured by Section 808(b)(1) or 809(a)(1). The term does not include consequential damages or incidental damages.

(26) "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(27) "Electronic agent" means a computer program, or electronic or other automated means, used independently to initiate an action, or to respond to electronic messages or performances, on the person's behalf without review or action by an individual at the time of the action or response to the message or performance.

(28) "Electronic message" means a record or display that is stored, generated, or transmitted by electronic means for the purpose of communication to another person or electronic agent.

(29) "Financial accommodation contract" means an agreement under which a person extends a financial accommodation to a licensee and which does not create a security interest governed by [Article 9 of the Uniform Commercial Code]. The agreement may be in any form, including a license or lease.

(30) "Financial services transaction" means an agreement that provides for, or a transaction that is, or entails access to, use, transfer, clearance, settlement, or processing of:

(A) a deposit, loan, funds, or monetary value represented in electronic form and stored or capable of storage by electronic means and retrievable and transferable by electronic means, or other right to payment to or from a person;

(B) an instrument or other item;

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

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

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

(31) "Financier" means a person that provides a financial accommodation to a licensee under a financial accommodation contract and either (i) becomes a licensee for the purpose of transferring or sublicensing the license to the party to which the financial accommodation is provided or (ii) obtains a contractual right under the financial accommodation contract to preclude the licensee's use of the information or informational rights under a license in the event of breach of the financial accommodation contract. The term does not include a person that selects, creates, or supplies the information that is the subject of the license, owns the informational rights in the information, or provides support for, modifications to, or maintenance of the information.

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

(33) "Goods" means all things that are movable at the time relevant to the computer information transaction. The term includes the unborn young of animals, growing crops, and other identified things to be severed from realty which are covered by [Section 2-107 of the Uniform Commercial Code]. The term does not include computer information, money, the subject matter of foreign exchange transactions, documents, letters of credit, letter-of-credit rights, instruments, investment property, accounts, chattel paper, deposit accounts, or general intangibles.

(34) "Incidental damages" resulting from breach of contract:

(A) means compensation for any commercially reasonable charges, expenses, or commissions reasonably incurred by an aggrieved party with respect to:

(i) inspection, receipt, transmission, transportation, care, or custody of identified copies or information that is the subject of the breach;

(ii) stopping delivery, shipment, or transmission;

(iii) effecting cover or retransfer of copies or information after the breach;

(iv) other efforts after the breach to minimize or avoid loss resulting from the breach; and

(v) matters otherwise incident to the breach; and

(B) does not include consequential damages or direct damages.

(35) "Information" means data, text, images, sounds, mask works, or computer programs, including collections and compilations of them.

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

(37) "Informational content" means information that is intended to be communicated to or perceived by an individual in the ordinary use of the information, or the equivalent of that information.

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

(39) "Insurance services transaction" means an agreement between an insurer and an insured which provides for, or a transaction that is, or entails access to, use, transfer, clearance, settlement, or processing of:

(A) an insurance policy, contract, or certificate; or

(B) a right to payment under an insurance policy, contract, or certificate.

(40) "Knowledge", with respect to a fact, means actual knowledge of the fact.

(41) "License" means a contract that authorizes access to, or use, distribution, performance, modification, or reproduction of, information or informational rights, but expressly limits the access or uses authorized or expressly grants fewer than all rights in the information, whether or not the transferee has title to a licensed copy. The term includes an access contract, a lease of a computer program, and a consignment of a copy. The term does not include a reservation or creation of a security interest to the extent the interest is governed by [Article 9 of the Uniform Commercial Code].

(42) "Licensee" means a person entitled by agreement to acquire or exercise rights in, or to have access to or use of, computer information under an agreement to which this [Act] applies. A licensor is not a licensee with respect to rights reserved to it under the agreement.

(43) "Licensor" means a person obligated by agreement to transfer or create rights in, or to give access to or use of, computer information or informational rights in it under an agreement to which this [Act] applies. Between the provider of access and a provider of the informational content to be accessed, the provider of content is the licensor. In an exchange of information or informational rights, each party is a licensor with respect to the information, informational rights, or access it gives.

(44) "Mass-market license" means a standard form used in a mass-market transaction.

(45) "Mass-market transaction" means a transaction that is:

(A) a consumer contract; or

(B) any other transaction with an end-user licensee if:

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

(ii) the licensee acquires the information or informational rights in a retail transaction under terms and in a quantity consistent with an ordinary transaction in a retail market; and

(iii) the transaction is not:

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

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

(III) a site license; or

(IV) an access contract.

(46) "Merchant" means a person:

(A) that deals in information or informational rights of the kind involved in the transaction;

(B) that by the person's occupation holds itself out as having knowledge or skill peculiar to the relevant aspect of the business practices or information involved in the transaction; or

(C) to which the knowledge or skill peculiar to the practices or information involved in the transaction may be attributed by the person's employment of an agent or broker or other intermediary that by its occupation holds itself out as having the knowledge or skill.

(47) "Nonexclusive license" means a license that does not preclude the licensor from transferring to other licensees the same information, informational rights, or contractual rights within the same scope. The term includes a consignment of a copy.

(48) "Notice" of a fact means knowledge of the fact, receipt of notification of the fact, or reason to know the fact exists.

(49) "Notify", or "give notice", means to take such steps as may be reasonably required to inform the other person in the ordinary course, whether or not the other person actually comes to know of it.

(50) "Party" means a person that engages in a transaction or makes an agreement under this [Act].

(51) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, governmental subdivision, instrumentality, or agency, public corporation, or any other legal or commercial entity.

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

(A) customized for a particular recipient by one or more individuals acting as or on behalf of the licensor, using judgment or expertise; or

(B) provided in a special relationship of reliance between the provider and the recipient.

(53) "Receipt" means:

(A) with respect to a copy, taking delivery; or

(B) with respect to a notice:

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

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

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

(II) in the case of an electronic notice, coming into existence in an information processing system or at an address in that system in a form capable of being processed by or perceived from a system of that type by a recipient, if the recipient uses, or otherwise has designated or holds out, that place or system for receipt of notices of the kind to be given and the sender does not know that the notice cannot be accessed from that place.

(54) "Receive" means to take receipt.

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

(56) "Release" means an agreement by a party not to object to, or exercise any rights or pursue any remedies to limit, the use of information or informational rights which agreement does not require an affirmative act by the party to enable or support the other party's use of the information or informational rights. The term includes a waiver of informational rights.

(57) "Return", with respect to a record containing contractual terms that were rejected, refers only to the computer information and means:

(A) in the case of a licensee that rejects a record regarding a single information product transferred for a single contract fee, a right to reimbursement of the contract fee paid from the person to which it was paid or from another person that offers to reimburse that fee, on:

(i) submission of proof of purchase; and

(ii) proper redelivery of the computer information and all copies within a reasonable time after initial delivery of the information to the licensee;

(B) in the case of a licensee that rejects a record regarding an information product provided as part of multiple information products integrated into and transferred as a bundled whole but retaining their separate identity:

(i) a right to reimbursement of any portion of the aggregate contract fee identified by the licensor in the initial transaction as charged to the licensee for all bundled information products which was actually paid, on:

(I) rejection of the record before or during the initial use of the bundled product;

(II) proper redelivery of all computer information products in the bundled whole and all copies of them within a reasonable time after initial delivery of the information to the licensee; and

(III) submission of proof of purchase; or

(ii) a right to reimbursement of any separate contract fee identified by the licensor in the initial transaction as charged to the licensee for the separate information product to which the rejected record applies, on:

(I) submission of proof of purchase; and

(II) proper redelivery of that computer information product and all copies within a reasonable time after initial delivery of the information to the licensee; or

(C) in the case of a licensor that rejects a record proposed by the licensee, a right to proper redelivery of the computer information and all copies from the licensee, to stop delivery or access to the information by the licensee, and to reimbursement from the licensee of amounts paid by the licensor with respect to the rejected record, on reimbursement to the licensee of contract fees that it paid with respect to the rejected record, subject to recoupment and setoff.

(58) "Scope" means the terms of a license describing the:

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

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

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

(D) duration of the license.

(59) "Seasonable", with respect to an act, means taken within the time agreed or, if no time is agreed, within a reasonable time.

(60) "Send" means, with any costs provided for and properly addressed or directed as reasonable under the circumstances or as otherwise agreed, to deposit a record in the mail or with a commercially reasonable carrier, to deliver a record for transmission to or re-creation in another location or information processing system, or to take the steps necessary to initiate transmission to or re-creation of a record in another location or information processing system. In addition, with respect to an electronic message, the message must be in a form capable of being processed by or perceived from a system of the type the recipient uses or otherwise has designated or held out as a place for the receipt of communications of the kind sent. Receipt within the time in which it would have arrived if properly sent, has the effect of a proper sending.

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

(62) "State" means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

(63) "Term", with respect to an agreement, means that portion of the agreement which relates to a particular matter.

(64) "Termination" means the ending of a contract by a party pursuant to a power created by agreement or law otherwise than because of breach of contract.

(65) "Transfer":

(A) with respect to a contractual interest, includes an assignment of the contract, but does not include an agreement merely to perform a contractual obligation or to exercise contractual rights through a delegate or sublicensee; and

(B) with respect to computer information, includes a sale, license, or lease of a copy of the computer information and a license or assignment of informational rights in computer information.

(66) "Usage of trade" means any practice or method of dealing that has such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question.

(b) [Definitions incorporated from Uniform Commercial Code.] The following definitions in [the Uniform Commercial Code (1998 Official Text)] apply to this [Act]:

(1) "Burden of establishing" [Section 1-201]

(2) "Document of title" [Section 1-201].

(3) "Financial asset" [Section 8-102(a)(9)].

(4) "Funds transfer" [Section 4A-104].

(5) "Identification" to the contract [Section 2-501].

(6) "Instrument" [Section 9-105(i) (1995 Official Text) or 9-102(a)(47) (1998 Official Text)].

(7) "Investment property" [Section 9-115(f) (1995 Official Text) or 9-102(a)(49) (1998 Official Text)].

(8) "Item" [Section 4-104].

(9) "Letter of credit" [Section 5-102].

(10) "Payment order" [Section 4A-103].

(11) "Sale" [Section 2-106].

Legislative note: If your State's definition differs from the 1998 Official Text, include the definition from the Official Text in subsection (a).

Comment

1. "Access contract." An access contract is an agreement that authorizes access to, or obtaining information from, an electronic facility, including a computer or Internet site, or that allows an equivalent form of access. The term does not include contracts that merely grant a right to enter a building or other physical location that contains information, or the mere purchase of a television, radio, or similar goods that merely create technological ability to access information.

An "access contract" is typified by "on-line" services. It also includes contracts for remote data processing, remote access to applications software or data stored on a third party computer, third party e-mail systems, and contracts for automatic updating from a remote facility to a database held by the licensee. The term does not cover interactions among computer programs within a person's own system - the access must be to another person's system or data. Thus, if a licensee of a spreadsheet program uses it to interact with the licensee's computers and data on the licensee's own network, that arrangement is not an access contract. However, a person can provide the equivalent of access, and thereby create an access contract, even though the information is only used on the licensee's system, such as where an on-line data provider elects to provide access to data in part by allowing its database to be loaded into the computer of a client. This performance retains all characteristics of an access contract and is within the definition. The same is true if a database loaded into the user's system is intermittently updated with data from remote systems. On the other hand, if a software publisher downloads licensed software into a licensee's system, the continuing right to use the software after it is downloaded is not an access contract.

An access provider may, or may not, provide contractual rights in the information accessed. Some transactions entail a three-party framework: in addition to the customer, one licensor provides access, while another (the content provider) licenses the information. This transaction involves two and, in some cases, three contracts. The first is between the content provider and the access provider. The second is between the access provider and the end user. The third arises if the content provider contracts directly with the end user; that too is an access contract. The contracts are independent of each other.

ATM cards, "smart cards," home banking products, and the like enable a customer to obtain information from an information processing system maintained by a financial institution, and would therefore reflect "access contracts" were they not excluded by section 103(d)(1) as a "financial services transaction" (excludes "related identifying, verifying, access-enabling, authorizing or monitoring information"). The parties may otherwise agree to use the contract formation provisions of this Act to enter into the initial customer relationship and thereafter to obtain an ATM card, smart card, or home banking software. They may further agree that the licensing aspects of their relationship will be governed by this Act. If so, the agreement is an "access contract." The agreement does not subject any transaction effected through use of an ATM card or home banking product to this Act, or alter the rules that would otherwise apply to such transaction.

2. "Agreement". This definition derives from Uniform Commercial Code § 1-201(3) (1998 Official Text). The term includes full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts of an agreement. The meaning of the agreement is determined by the language the parties use and their actions, interpreted in the light of commercial practice and other surrounding circumstances. See Section 116(c); Section 301 (parol evidence rule). Whether an agreement has legal effect is determined by this Act or other applicable law. Section 117(b).

3. "Attribution procedure." An "attribution procedure" is a procedure used to identify the person who sent an electronic message or to verify the integrity of its content. In general, an attribution procedure has substantive effect only if it was agreed to or adopted by the parties or established by applicable law. Agreement to or adoption of a procedure may occur directly between the two parties or through a third party. For example, the operator of a system that includes information provided by third parties may arrange with database providers and customers for use of a particular attribution procedure. Those arrangements establish an attribution procedure between the customers and the database providers. An attribution procedure may also be established by two parties in the expectation that a third party may rely on it. For example, a digital signature may be issued to an individual pursuant to an agreement between the issuer and the individual, but then accepted or relied on by another party in a separate transaction. Use of the signature is an attribution procedure in that transaction. Similarly, a group of member companies may establish attribution procedures intended to bind members in dealing with one another. Such arrangements are attribution procedures under this Act. The substantive provisions on attribution are in Sections 108, 212 and 213.

4. "Authenticate." This term replaces "signature" and "signed." A similar change in terminology is made in Uniform Commercial Code Article 9 (1998 Official Text). In this Act, the term "sign" has the meaning used in Uniform Commercial Code § 1-201 (1998 Official Text), except that it is not limited to authenticating a writing. The definition is technologically neutral. This makes clear that qualifying electronic systems fulfill former paper-based requirements. This is consistent with the policies of the federal Electronic Signatures in Global and National Commerce Act that preclude discrimination against electronic records and signatures solely because they are electronic in character.

Any "signature" under other law is an authentication under this Act. In addition, authentication includes qualifying use of any identifier, such as a personal identification number (PIN) or a typed or otherwise signed name. It can include actions or sounds such as encryption, voice and biological identification, and other technologically enabled acts if done with proper intent. See Parma Tile Mosaic & Marble Co. v. Short, 87 N.Y.2d 524, 663 N.E.2d 633 (N.Y. 1996) (intent requirement not met). There is no requirement under this Act that the authenticated record be retained by a party, but that requirement may exist under other law.

An authentication may be on, logically associated with, or linked to the record. With digital technology, the analogy between signing a record electronically and signing a paper is not precise. "Logically associated" makes it clear that the association between an authentication and a record need not be physical in nature. However, the association must support the inference that the authenticating party intends to adopt or accept the associated or referenced record. "Referring to" or "linked to" captures the traditional concept of incorporating a record or term by reference, as well as use of an electronic connection, such as an Internet hyperlink.

An "authentication" may express various intended effects. What effects are intended are determined by the context and objective indicia associated with that context.

5. "Automated transaction." This term refers to contracts formed automatically and which are effective even though one or both parties operates through an electronic agent instead of a human being (an individual). The term is not inconsistent with a system in which, when an aspect of the transaction appears irregular, or when a message or transaction fails automated system edits, repair or review by an employee occurs. The transaction qualifies as an automated transaction if such review does not occur in the ordinary course when no system problems exist and there was no review in the particular case by an employee authorized to act on behalf of the employer in the particular case.

6. "Cancellation." This definition follows Uniform Commercial Code § 2-106(4) (1998 Official Text); no substantive change is intended by language variations. Cancellation is a remedy for breach. The effect of cancellation is stated in Section 802.

7. "Computer." The definition of "computer" draws on definitions in federal and state criminal law, tax law and other resources. The term does not include a traditional television set, radio or toaster even though such goods may contain a microprocessor. It might include new generations of machines that combine computation, word processing, Internet access, and traditional broadcast reception. The definition should be applied by the courts with common sense. In various states, unauthorized access to a computer is a crime, but while the definition of computer in those statutes is broad, courts exercise common sense in applying the definition, an approach that should also be true here. Thus, while an automobile might contain a computer or several computers, the automobile is not itself a computer. A microwave oven with timing operations controlled by software is not a computer, but ordinary goods enhanced by software. On the other hand, a desktop computer that receives telephone calls, music, television images, or fax messages is still a computer.

8. "Computer information." This term covers information that is in electronic form and that is obtained from, accessible with, or usable by, a computer; it includes the information, the copy of it (e.g., a diskette containing the information), and its documentation (including non-electronic documentation). As defined, "electronic" includes digital information or information in another form having similar capabilities. This covers analog and future computational technologies, eliminating the possibility that the Act might be limited to current technology. The term does not include information merely because it could be scanned or entered into a computer; it is limited to electronic information in a form capable of being directly processed in a computer. "Computer information" does not generally include printed information or information in other non-electronic formats.

9. "Computer information transaction." This term helps to define the scope of this Act. Section 103. It requires an agreement involving computer information. The term includes transfers (e.g., licenses, assignments, or sales of copies) of computer programs or multimedia products, software and multimedia development contracts, access contracts, and contracts to obtain information for use in a program, access contract, or multimedia product. However, the mere fact that parties agree to communicate in digital form does not bring a transaction within this definition, nor does a decision by one party to use computer information when the contract does not require this.

This definition focuses on the essence or basic nature of the transaction. Thus, an agreement to use e-mail to communicate about a contract for the shipment of petroleum or to file an application in digital form does not bring the transaction within this definition. A contract for an airline ticket is not a computer information transaction simply because the ticket is in digital form. The subject matter of that agreement is not the computer information, but the service - air transportation. Similarly, this term does not cover professional services or alter standards of professional conduct, such as services rendered by a member of a regulated profession like a doctor or a lawyer. Merely because such professional services are rendered using computer information or the product is delivered in the form of computer information does not convert these professional services to a computer information transaction. See Comments to Section 103. Standards of professional behavior involving interaction with individual clients govern professional services, such as the giving of legal advice or the performance of an operation, and the standards are not affected by this Act. On the other hand, the term does include an agreement to develop a computer program, even if the person developing the program is also a member of a regulated profession.

A transaction is not for the "creation" of computer information in the sense intended here if the contracted-for activities are merely secretarial, ministerial, or clerical in nature. The computer information must be created (i.e., produced or developed) through some business, professional, artistic, imaginative, or similar effort. Of course, a transaction that otherwise qualifies and that occurs with respect to information already in the form of computer information is within the definition regardless of how the information was put into that form.

10. "Computer program." The first sentence follows copyright law. 17 U.S.C. § 101 (1998). The second sentence distinguishes between computer programs as operating instructions communicated to a computer and "informational content" communicated to human beings. This distinction parallels that used in discussions of formal programming languages between syntax (grammar) and semantics (meaning). As used in this Act, "computer program" refers to functional and operating aspects of a digital or similar system, whereas "informational content" refers to material that communicates to a person. In resolving an issue that turns on this distinction, the test lies in whether the issue concerns operations (program) or communicated content (informational content). The definition pertains solely to contract law issues. It does not relate to the copyright law issue of distinguishing between a process and copyrightable expression. It is more like that in copyright law between a computer program as a "literary work" (code) and output as an "audiovisual work" (images, sounds). In copyright, that distinction relates to property rights and infringement issues. In this Act, the distinction relates to contract law issues such as liability risk and performance obligations.

11. "Consequential damages." This definition is from Uniform Commercial Code § 2-715(2)(1998 Official Text). Except for the clarification regarding "direct damages" and "incidental damages," no change is intended. For example, while the definition does not specifically exclude losses that could be avoided by mitigation through cover or otherwise, a duty to mitigate exists under Section 807. A party can recover compensation only for losses that it could not reasonably have avoided. Of course, the idea of avoidance through reasonable steps such as cover or otherwise must be assessed with due regard to how damages are being measured. For example, if recovery is based on a formula related to lost volume, the damages measure itself assumes that engaging in another transaction is not a substitute for the lost transaction and, thus, mitigation through a replacement transaction is not relevant. See discussion of substitute transactions in Sections 808 and 809.

Consequential damages do not include "direct" or "incidental" damages. Consequential loss includes loss of anticipated benefits as a result of not being able to exploit or rely on the expected contractual performance, such as lost profits of the injured party, lost third-party royalties that would have accrued from a licensee's proper performance, and lost income from wrongful gains realized by another party from misuse of confidential information. Consequential damages also include damage to reputation, loss of privacy, lost value of a trade secret from wrongful disclosure or use, and losses or damage to data or property caused by a breach.

Except as provided in Section 807 or as limited by agreement, consequential damages may be recovered by either party. The losses must be an ordinary and predictable result of the breach and must have been foreseeable. For purposes of damages computation, the term "reason to know" should be interpreted in a manner consistent with cases under Uniform Commercial Code Article 2. For an injured party to recover for economic losses resulting from its special circumstances, the party in breach must have had notice of those circumstances at the time of contracting. In contrast, losses from ordinary, general requirements can often be presumed to have been within the contemplation of the other party. To be foreseeable, the losses must not result from atypical risk taking by the aggrieved party, such as in a failure reasonably to maintain back-up systems for retrieval of data.

Damage to other property (i.e., not the property that is the subject of the contract itself) may be consequential damage. If injury follows use of a computer program without discovery of a defect causing the damage, the question of "proximate" cause includes whether it was reasonable for the injured party to use the information without inspection that would have revealed the defect. Proximate causation may not exist where damages result from misuse or from a use that violates clear warnings against the particular type of use.

12. "Conspicuous." This definition follows Uniform Commercial Code § 1-201(10) (1998 Official Text), but is updated for electronic commerce. Whether a term is conspicuous is determined by the court. Section 117. The definition of "conspicuous" does not change requirements of other law that specify the content, timing or location of disclosures or warnings. If such requirements exist, they govern. Sections 104 and 116. Section 104 specifically provides that a standard of conspicuousness in an applicable consumer protection law applies with respect to that law.

In contexts governed by this Act, a term is conspicuous if it is so positioned or presented that the attention of an ordinary person reasonably ought to have been called to it. Conspicuous terms are often contained in a record, but the concept includes oral or automated voice presentations that meet the standard. For electronic records, whether a term is conspicuous is gauged by the condition of the message as it would be received or first viewed by a person using a system that the parties adopted for such records, a system that the sender knows the recipient is using or, in the absence of the foregoing, an ordinary system or method of receiving or reviewing such messages. For an electronic agent, presentation of the term must be capable of invoking a response from a reasonably configured electronic agent.

As in Uniform Commercial Code Section 1-201(10) (1998 Official Text), this Act describes several methods of making a term conspicuous. The illustrations are not exclusive. For cases outside their terms, the general standard governs.

The definition adapts the U.C.C. standard to cover electronic commerce. Paragraph (A)(ii) contemplates setting off a term or label by symbols so that conspicuous formatting can be reliably transferred electronically (font size, color and other attributes might not always be transferable). Paragraph (A)(iii) deals with hyperlinks and related Internet technologies. It contemplates a case in which a computer screen displays an image or term or a summary or reference to it, and the party using the screen, by taking an action with reference to it, is promptly transferred to a different display or location wherein the contract term is available. To be conspicuous, the image, term, summary or reference must be prominent and its use must readily enable review of the actual term. The access must be from the display and not require taking other actions such as a telephone call or driving to a store. When the term is accessed, it must be readily reviewable. The fact that an entire contract is prominently referenced does not automatically mean that a particular term in it is conspicuous.

Paragraph (B) is independent of paragraph (A). It recognizes a procedure by which, without taking action with respect to the term or reference, the party cannot proceed. Thus, a screen that states: "There are no warranties of accuracy with respect to the information" in a manner that precludes the user from proceeding without assenting to or rejecting this term, suffices.

13. "Consumer" and "consumer contract." A "consumer" is an individual (human being) who obtains information primarily for personal, household, or family purposes. Whether an individual is a consumer with reference to a transaction is determined at the time of contracting and in light of the then-intended use of the information. For computer information, many contracts for personal use are not consumer contracts (e.g., stock broker personally using software to monitor client investments). The definition distinguishes profit-making, professional, or business use, from non-business or family use. Only when the contract is primarily for the latter is there a consumer contract. A license of software distributed for general personal use and acquired solely for tracking household finances is a consumer contract, but a transaction acquiring software for use in an investment management business is not a consumer transaction. The profit-making standard is followed in other areas of law. See, e.g., Thoms v. Sundance Properties, 726 F.2d 1417 (9^th Cir. 1984); In re Booth, 858 F.2d 1051 (5^th Cir. 1988); In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987); Truth in Lending Act, 15 U.S.C. § 1603 (excludes extensions of credit "primarily for business, commercial, or agricultural purposes"). A purpose stated in the agreement ordinarily determines the purpose of the transaction for purposes of this definition.

14. "Contract." This definition is from Uniform Commercial Code § 1-201(11) (1998 Official Text).

15. "Contract fee." This term includes any monetary payment under a contract, including royalties. It does not include other forms of consideration exchanged in a transaction or their value.

16. "Contractual use term." This term includes any enforceable contractual term that defines or limits access to, use or disclosure of information or informational rights. Use terms ordinarily relate only to the copies and information provided under the contract or copies made of them. Unless otherwise agreed, a contractual use term does not govern the same information lawfully obtained from other sources. For this definition, the use restriction must come from a contract and not simply from regulatory or property law. The term must be enforceable to be within the definition. Thus, if trade secret law bars enforcement of a particular term, that term is not a contractual use term under this Act to the extent it is unenforceable.

Terms establishing the scope of a license are contractual use terms. Under intellectual property law, however, with respect to determining whether an infringement occurs, not all contract terms are equal. See Sun Microsystems v. Microsoft Corp., 188 F.3d 1115 (9^th Cir. 1999). This Act does not alter the distinction with reference to infringement claims. In contract law, however, breach of any contractual use term breaches the contract. Whether there is also a right of action for infringement is determined by other law.

17. "Copy." This term refers to the medium containing the information. The medium can be tangible or electronic. The time during which information is fixed on the medium can be temporary if this fulfills the required performance. The copyright law question of when a copy occurs within computer memory or in a transient image does not relate to contract law issues and is not dealt with in this Act. Stenograph L.L.C. v. Bossard Assoc., Inc., 46 U.S.P.Q.2d 1936 (D.C. Cir. 1998); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9^th Cir. 1993).

18. "Course of dealing." This term is from Uniform Commercial Code § 1-205 (1998 Official Text). It refers to a sequence of conduct between the parties prior to the agreement at issue.

19. "Course of performance." This term is from Uniform Commercial Code § 2-208 (1998 Official Text). It refers to conduct during performance of the agreement; conduct prior to the agreement may be a "course of dealing". Both terms are part of the commercial approach in this Act to interpreting contracts in a practical manner. The parties know best what their agreement meant; their conduct is often the best indication of that meaning. A course of performance is relevant to determine the meaning of the agreement. Uniform Commercial Code § 1-205, comment 2 (1998 Official Text).

20. "Delivery." Delivery can occur by transfer of possession of a tangible copy or by electronic transfer. In electronic delivery, a copy of information may not move from one location to another, but delivery involves copying the information into another location or making it available in a system shared or accessible by the recipient. There are many ways to transfer possession or control. For example, in an electronic delivery, a transfer of possession or control occurs when information comes into existence in an information processing system or at an address in a form capable of being processed by or perceived from a system of that type if the recipient uses, or otherwise has designated or holds out, that place or system for receipt of copies of the kind.

21. "Direct damages." Direct damages are compensation for losses associated with the value of the contracted for performance itself as contrasted to loss of a benefit expected from use of the performance or its results. Direct damages are measured by Sections 808(b) and 809(a). They are capped by the contracted-for price or market value for the performance as appropriate. This Act rejects cases that treat as direct damages losses that relate to anticipated benefits from use such as Chatlos Systems, Inc. v. National Cash Register Corp., 670 F.2d 1304 (3d Cir. 1982), cert. dism., National Cash Register Corp. v. Chatlos Systems, Inc., 457 U.S. 1112 (1982). Those are consequential damages. Thus, if a computer program is purchased for $1,000 and, if merchantable, would yield profits or cost-savings in business of $10,000, but it is totally defective, "direct" damages are $1,000. If recoverable, the lost profits or expected cost-savings are consequential damages.

22. "Electronic." This term is technology neutral, and encompasses forms of information-processing technology that may be developed in the future.

23. "Electronic agent." This term refers to an automated means for making or performing contracts. The agent must act independently in a manner relevant to creating or performing a contract. Mere use of a telephone or e-mail system is not use of an electronic agent. The automated system must have been selected, programmed or otherwise intentionally used for that purpose by the person that is bound by its operations. The legal relationship between the person and the electronic agent is not equivalent to common law agency since the "agent" is not a human. However, parties that use electronic agents are ordinarily bound by the results of their operations.

24. "Electronic Message." A message is distinguished from a "record" by the fact that a message is intended for communication to another person or an electronic agent. Communication of a message may be by copying it into another location or making it available in a system shared by or accessible to the recipient. In effect, it is stored or generated for purposes of communicating to another.

25. "Financial accommodation contract." A financial accommodation contract is 1) a loan in whole or in part to acquire computer information or 2) a lease of a copy of software or other computer information. The recipient of the accommodation is the licensee. If a finance contract creates or provides for a security interest governed by Article 9 of the Uniform Commercial Code, the contract is not a "financial accommodation contract"; the interest is governed by Uniform Commercial Code Article 9 and not this Act. An agreement in which royalties for use are paid periodically is not a financial accommodation contract, but simply a royalty-bearing license (or assignment).

26. "Financial services transaction." This term includes a variety of financial system activities and transactions that are excluded from this Act under section 103(d). Many are governed by federal law or by the Uniform Commercial Code. The phrase "monetary value represented in electronic form" includes electronic currency. The term "financial services transaction" does not include contracts to acquire software for use in banking or other financial service activities even if the transactions that the software is used to process are financial services transactions that are excluded from the Act. Section 103(d). Nor does it apply to non-regulated information services, such as a virtual mall, provided on the financial institution's website.

27. "Financier." A financier is a creditor or a lessor dealing with the licensee under a financial accommodation contract. The financier may have any of several relationships to licensed computer information. In one the financier obtains rights as a licensee for purposes of transfer to the eventual licensee, which is the accommodated party. This is like a finance lease under Uniform Commercial Code Article 2A, but the focus is licensed computer information, rather than leased goods. A second kind of relationship arises where the party giving the accommodation does not obtain rights in the license as against the licensor, but obtains a contractual right to prevent the licensee's use of the information in the event of breach of the financial accommodation contract.

The licensor in the underlying license is not a financier for purposes of this Act. A licensor may obtain a security interest under Article 9 and would, with respect to that interest, have the rights of a secured party under Article 9.

28. "Good Faith." This definition adopts and expands on Uniform Commercial Code § 2-103(b) (1998 Official Text). It rejects pure "honesty in fact" as the sole standard of good faith. However, good faith is not a negligence or reasonable care standard. "Observance of reasonable commercial standards of fair dealing" is concerned with the fairness of the conduct rather than the care with which an act is performed. Both fair dealing and ordinary reasonable care are judged in light of reasonable commercial standards, but those standards in each case are directed to different aspects of commercial conduct.

While good faith in performance is an element of all contracts covered by this Act, the obligation of good faith does not override express contract terms or the right to enforce them. See Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7^th Cir. 1990); Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo. 1995); Badgett v. Security State Bank, 116 Wn.2d 563, 807 P.2d 356 (1991). The primary application of the concept is that, when a party has discretion under the contract, that discretion should be exercised in a good faith manner. Davis v. Sears, Roebuck & Co., 873 F.2d 888 (6^th Cir. 1989). Good faith does not require that a party act to benefit or avoid harm to the other at the cost of rights that it fairly has under the agreement.

29. "Goods." This definition clarifies that computer information, including computer programs, are not goods for purposes of this Act. The definition does not alter the definition of goods in any consumer protection law. Some but not all of the items or transactions treated as financial services transactions in this Act are also excluded from this definition of goods. No inference is intended that those not so excluded, such as payment orders or loans, are thereby treated as goods.

30. "Incidental damages." This term corresponds to Uniform Commercial Code Article 2 (1998 Official Text). Incidental damages are expenses incurred after breach. They include the cost of seeking or arranging for mitigation, but not the actual expenditure for the mitigation itself, which is covered in measuring direct or consequential damages.

31. "Information." This term embraces a wide range of subject matter, but as used in this Act it is limited to transactions within the scope of the Act. "Information" is not limited to subject matter in which informational property rights exist. It includes, for example, factual data if subject to a contractual relationship. As used here, "data" refers to facts whether or not organized or interpreted. "Mask work" is defined in federal law; it refers to a representational technology used in creation of semiconductor products.

32. "Information processing system." This term includes computers and other information processing systems. The term is used primarily in reference to sending and receiving notices.

33. "Informational content." This is information whose ordinary use involves communication of the information to a human being (individual). It is information that humans read, see, hear and otherwise experience. For example, if an electronic database includes images or text and a program enabling display of or access to them, the images are informational content while the search program is not. A Westlaw search program is not informational content, but the text of the cases is. The term applies even if the person creating the informational content does not intend to reveal it to others; this is because preparation involves an intent that the information be perceivable at least by its creator. Informational content need not actually be communicated; it merely must be information that in ordinary use is communicated to individuals. For example, stock quotes are informational content even if an investor uses an electronic agent to make orders and never reads the actual quotes themselves. However, the term does not include computer program instructions in object code that merely control interaction of a computer program with other programs or with a machine or device.

34. "Informational rights." This term includes "intellectual property" rights. It also includes rights created under any law that gives a person a right to control use of information independent of contract, such as may be developing in privacy law. As in traditional intellectual property law, the rights need not be exclusive as to all other persons and all uses. Other law determines whether such rights exist; this Act does not modify those laws. The term does not include mere tort claims such as the right to sue for defamation.

35. "Insurance services transaction." This term parallels that of "financial services transactions" with language changes to reflect the nature of insurance-related transactions. It identifies transactions that are subject to extensive regulation and separately developed law and excludes them because they are regulated. Section 103. It refers to an agreement between the insurer and insured relating to access to, use, transfer, clearance, settlement, or processing of the policy or contract, or payments or rights to payment under it. As with financial services transactions, the term does not include contracts to acquire software, nor does it apply to non-regulated information services, such as a virtual mall, provided on the insurance institution's website.

36. "Knowledge." This term is from Uniform Commercial Code § 1-201(25) (1998 Official Text). It does not include constructive notice or any duty to inquire.

37. "License." A license is an agreement the terms of which entail a limited or conditional transfer of information or a grant of limited or restricted contractual rights or permissions to use information. A contract "right" is an affirmative commitment that a licensee may engage in a specific use, while a contract "permission" means simply that the licensor will not object to the use. Either can be the basis of a license. No specific formality of language is required. For purposes of this Act, the term includes consignments of copies of information but does not otherwise alter the legal nature of a consignment. The definition is solely for purposes of this Act and does not alter treatment under other laws, such as tax law.

A transaction is not a license merely because as a matter of law a transferor retains informational property rights that restrict the transferee's ability to use the information. The term thus does not include an unrestricted sale of a copy of a copyrighted work; an unrestricted sale does not involve express contractual terms restricting use of the information. Similarly, a "copyright notice" in a book that merely states the restrictions on use that remain after a first sale under copyright law is not a license. On the other hand, a software agreement whose terms expressly govern use of the software is a license even if the agreement also gives the licensee ownership of the copy. A license exists if a contract grants greater rights or privileges than a first sale, if it restricts rights or privileges that might otherwise exist, or if it deals with other issues of scope of use.

Whether a contract is a license does not depend on who has title to a copy. Title to a copy is distinct from questions about the extent to which use of information is controlled by contract. DSC v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999), cert. den. 528 U.S. 923 (1999) indicates how the issues can be treated. Restrictions in a license that are materially inconsistent with ownership of a delivered copy may result in the holder of the copy not being its owner.

Licenses are contracts. Whether the terms of a license are enforceable is determined under this Act and other applicable law, including copyright law. The requirements for an enforceable agreement must be met. The term does not include the myriad non-commercial, casual or other exchanges of information that occur in normal political or social discourse, even if there may be incidental restrictions on use of the information because they do not involve a contractual relationship or a computer information transaction.

38. "Licensor" and "Licensee." These definitions refer to the transferor and transferee in any contract covered by this Act, whether or not the contract is a license. In situations where each party supplies computer information to the other, each is a licensor as to the information it provides and a licensee as to the information it receives. Between a provider of access in an access contract and its customer, the provider is the licensor. Between the provider of access and a provider of the information to be accessed, the provider of the information is the licensor.

39. "Mass-market license" and "mass-market transaction." The term "mass market license" is new and the definition must be applied in light of its intended and limited function. That function is to describe small dollar value, routine transactions involving information that is directed to the general public when the transaction occurs in a retail market available to and used by the general public. The term includes all consumer contracts and also some transactions between businesses if they are in a retail market. One purpose of the term is to avoid artificial distinctions among business and consumer transferees in an ordinary retail market. Mass-market transactions do not include commercial transactions between businesses using ordinary commercial methods, such as purchase orders, terms offered to businesses but not to consumers, or online and access systems focused on the business-business marketplace.

A "mass-market" transaction is characterized by 1) the market in which the transaction occurs, 2) the terms of the transaction, and 3) the type of information involved. The market is a retail market where information is made available in pre-packaged form under generally similar terms to the general public as a whole and in which the general public, including consumers, is a frequent participant. "Retail market" has its standard dictionary meaning, which refers to sales (or other transfers) of commodities in small quantities primarily to consumers. The prototypical retail context is a department store, grocery store, gas station, shopping center, or the like. It does not include contexts that center on business-business trade. Retail locations are open to, and in fact attract, the general public as a whole. The products are available to anyone who enters the retail location and pays the standard retail price. While retail merchants make transactions with other businesses, the predominant type of transaction involves consumers. Transactions in a retail market involve small quantities, non-negotiated terms, and transfers to end users rather than transferees who plan to resell or re-license the product. The phrase "in a quantity" is inherent in the idea of retail and emphasizes that the concept involves purchases of small quantities.

The computer information must be of a type aimed at the general public as a whole, including consumers. This does not include information earmarked for a business or professional audience and which is not ordinarily acquired by consumers, nor does it include information earmarked for members of an organization or persons with a separate relationship to the information provider. For example, software provided to and usable only by members of an association or customers of a particular institution, even if otherwise within this Act, are not mass-market transactions. In determining when the term applies, courts should be guided by the purpose of the definition which is to avoid artificial distinctions among business and consumer purchasers in an ordinary retail market. The covered transactions do not include specialty information for business or professional uses, information for specially targeted limited audiences, information distributed in non-retail transactions, or professional use information. The transactions involve computer information routinely acquired by consumers or that tend to appeal to a general public audience as a whole, including consumers. Generally, this is inconsistent with substantial customization of the information for a particular end user. Customization that is routine in mass markets or that is done by the licensee after acquiring the information does not take the transaction outside the concept of a mass-market transaction.

The transaction must be with an end user. An end user is a licensee that intends to use the information or informational rights in its own business or personal affairs. An end user is not engaged in reselling, distributing, sublicensing, commercial public performances of the information, or otherwise making the information commercially available to third parties, directly or indirectly.

All consumer transactions are mass-market. For non-consumer transactions, subsection (B)(iii) expressly excludes several transactions commonly not associated with routine retail transactions. It excludes any transaction intended for redistribution of the information by further license, loan or sale, or for public performance of a copyrighted work. Such transactions involve no attributes of a retail market. For purposes of this Act, public performance or display does not include use by a library patron of software acquired by the library in the mass market. In online contracts, consumer contracts are mass-market transactions, but business to business transactions are not. Business acquisition of software through online access and other non-retail transactions are outside of the definition. This gives electronic commerce room to develop without regulation while preserving consumer interests.

40. "Merchant." This definition is from Uniform Commercial Code § 2-104 (1998 Official Text). The definition covers a person that holds itself out as experienced even if the person has not actually engaged in prior transactions of the type. The term "merchant" has roots in the "law merchant" concept of an expert or professional in business. This status may be based on specialized knowledge as to the information or general or specialized knowledge about business practices, or both. Which type of knowledge is sufficient for merchant status is determined by the nature of the issue to which the term applies. In this Act, as relevant to business practices, "merchant" refers primarily to general knowledge of business practices in any field, rather than to expertise in a specific field. Section 401(a) and (e) and Section 403, however, require a more focused expertise in the particular type of information.

When a party employs an agent, merchant status does not always depend on the principal's knowledge. An organization is charged with the expertise of its employees. Even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or personnel familiar with business practices.

41. "Non-exclusive license." In a nonexclusive license, the licensor does not foreclose itself from making additional licenses involving the same subject matter and same general scope. A nonexclusive license has been described as nothing more than a promise not to sue. It does not convey property rights in the information to the licensee.

42. "Notice." This definition is from Uniform Commercial Code § 1-201(25) (1998 Official Text). Notice exists when a person has knowledge or has received notification or has reason to know of a fact. When or if notice may cease to be effective is not governed by this Act, but by other law.

43. "Notify" or "give notice." This definition is from Uniform Commercial Code § 1-201(26) (1998 Official Text). This term is used when the essential event is the dispatch of notice, not its receipt. If receipt is the relevant standard, that is stated in the statute.

44. "Party." This definition is from Uniform Commercial Code § 1-201(29) (1998 Official Text). Reference to a "party" includes a person acting through an agent.

45. "Person." This term refers to individuals (human beings) and to business or other organizations, whether or not treated in law as formal entities. It is distinguished from the narrower term, "individual," which refers only to a natural human being, whether acting as a representative or on the individual's own behalf.

46. "Published informational content." This is the type of information most closely associated with free expression. In previous technology, this type of information refers to newspapers, books, phonorecords and the like (which are outside the scope of this Act). To be within this definition, the information must be informational content, that is, intended to communicate to a human being. Informational content is published content when created for or distributed to a group of recipients as a whole in generally the same form. The term includes interactive content and content made publicly available in a database, even if only portions of it are used by individual recipients who, for example, may search the database using a computer program. The information is still generally available; the end user selects from available information. That is like the reader of a newspaper who reads part, but not all, of the newspaper. The term also includes the informational product of automated systems that supply selected portions of a larger database to individual licensees based on programmed parameters.

Published informational content does not include content tailored by individuals (human beings) acting on behalf of the licensor to meet a specific recipient's needs, nor does it apply to information provided in a special relationship of reliance. The phrase "special relationship of reliance" refers to transactions in which the provider knows that a particular licensee plans to rely on particular data provided by the licensor and that the licensee expects the licensor to tailor the information to the client's specific business or personal needs. That type of relationship arises only with respect to licensors who possess unique or specialized expertise or who are in a special position of confidence and trust with the particular licensee such that reliance is justified and the licensor has a duty to act with care. In a special relationship of reliance the information provider is specifically aware of and personally tailors information to the needs of the particular licensee as an integral part of the provider's primary business. A reliance relationship does not arise for information made generally available to a group in standard form, even if those who receive the information subscribe to the service because they believe it is relevant to their commercial or personal needs.

47. "Receive." This definition distinguishes between performances and notices. As to performances, it corresponds to Uniform Commercial Code § 2-103(1)(e) (1998 Official Text). With respect to notices, a notice is received when a message is delivered to a place designated or held out by the recipient for such notices even if the place is controlled by a third party. Arrival at an appropriate private post office box is receipt even if the addressee does not remove or read the message until later. Similarly, arrival at an appropriate electronic mail address is receipt by the addressee. The definition is met by arrival at a location only if the person holds out that location or system as a place for receiving notices of the kind. Parties often require that notice be to a particular address or person. If parties agree to send notice to a particular e-mail address, arrival at that location suffices; delivery to a different e-mail address does not.

The message must be capable of being processed by an ordinary system of the type involved. This refers to the type of system in its general, reasonably expected configuration and not to an atypical configuration known or knowable only to the party operating the system. Whether the message actually is processed is not relevant to receipt; similarly, a letter placed in a party's post office box is received even if not opened.

48. "Record." A record must be in, or capable of being retrieved in, perceivable form. Electronic text recorded in a computer memory that could be printed or displayed from that memory constitutes a record. Similarly, a tape recording of an oral conversation or a video taping of actions could be a record.

49. "Release." A release is a waiver or a nonexclusive permission not accompanied by other commercial attributes such as an ongoing obligation to pay or an obligation to provide the means to make use of the information. A release is a form of license. The term is used in this Act to identify transactions in which the sole purpose is to permit use and applies where agreements of the type are often made on a less formal basis than a commercial license. Some releases are enforceable as "quasi-contracts." This Act does not change that law.

50. "Return." In this Act, a "return" refers to acts that restore a party to its initial position if the party rejected contract terms in a record and, as a result, the transaction will not be carried forward. See sections 113, 208, and 209. A return requires redelivery to the licensor or its agent of any computer information already delivered that would have been covered by the rejected contract. When a licensee declines the contract, "return" entails reimbursement of any fees paid on re-delivery of all copies of the information and documentation. The information and documentation must be redelivered in their original condition. By consent of the licensor, the copies can be destroyed in accordance with its instructions. A right to a return under this Act applies only to computer information and does not affect goods, such as a computer that contains the software.

Return is not a remedy for breach. It is a right created by this Act or the agreement that arises if a party refuses contract terms but had previously committed to, or actually paid the contract fee. A right of return allows the party a meaningful opportunity to decide to accept or reject the contract. If a party accepts contract terms, there is no right to a return, but if the computer information is defective, the aggrieved party may have a right to refuse the product and recover the contract fee and any other appropriate damages as a remedy for breach.

A return must be sought within a reasonable time. What is a reasonable time depends on the terms of the agreement or, if the agreement is silent, the commercial context. Section 117.

A right to a return may arise in "bundled" information products (products that include separate information products transferred as a whole for a single fee). Pricing in bundled transactions is not based on summing the fees that would be required for each product in an unbundled setting; often, bundled products include information products provided for no or a lesser charge, even though the information might have a different price in other transactions. In some cases, there is no fee attributable to any of the bundled information products included with other products, such as a computer.

If separate bundled products are separately priced, a return is for the contract fee for the information product as to which the contract terms were rejected. Otherwise, a return must be of the entire bundled product and reimbursement of the entire price, if any, attributed to that entire product. For a return for a separately stated price to occur, the contract price for the item must be separately stated in the sense that the agreement identified an amount for the particular information. A court cannot unbundle products and estimate appropriate prices in what is often a complex commercial arrangement premised on the economics of bundling multiple products. If no price is attributed in the agreement to the bundled information products, a return does not require reimbursement of a fee since none has been charged.

51. "Scope." This definition refers to contract terms that define the central elements of a license that relate to aspects of use of the information. Scope terms define the product. The same computer information has entirely different commercial characteristics and value depending on the scope of rights licensed. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115 (9th Cir. 1999); Graham v. James, 144 F.3d 229 (2d Cir. 1998). A license that allows use of a word processing program in a single computer is not the same product as a license to make and distribute copies of that word processing software throughout a region. Neither license is the same product as a license that transfers a copy but limits use to three days at home. They are all different even though the program and the copy may be exactly the same and the differences can only be determined by reading the license.

53. "Standard form." The definition refers to forms, not standard terms. A form consists of record containing a group of terms prepared for frequent use as a contract. The definition does not cover a tailored contract comprised of "terms" selected from multiple prior agreements. The form must have been actually used without negotiation other than of the terms noted in the definition. If a standard form is offered but then negotiated or changed other than with respect to those ordinarily tailored terms, the resulting record of the contract is not a standard form. "Negotiated" for purposes of this definition means actually bargained for or about, or pointed out with an opportunity for meaningful bargaining, even if assented to without actual bargaining.

54. "Term." This definition is from Uniform Commercial Code § 1-201(42) (1998 Official Text). The word refers to a discernible element of an agreement. The word "clause" has the same meaning.

55. "Termination." This definition is from Uniform Commercial Code § 2-106 (1998 Official Text). The effect of terminating a contract is discussed in Sections 616-618.

56. "Transfer." This word, as used with respect to conveyances of contractual interests, refers to actual transfers of a contractual interest, as contrasted to agreements that merely employ another person to act on behalf of the transferor under a delegation or sublicense. Some of these transfers might be described as an assignment of the contract.

57. "Usage of trade." This term is from Uniform Commercial Code § 1-205 (1998 Official Text). This Act treats usage of trade as a factor in determining the commercial meaning of the agreement. The language of an agreement is interpreted as meaning what it may fairly be expected to mean to parties involved in the particular commercial transaction in a given locality or in a given vocation or trade. A usage of trade must have the "regularity of observance" indicated in the text. It is not required that a usage be "ancient or immemorial," "universal" or the like. Full recognition is available for new uses and for uses currently observed by the majority of merchants, even though some do not. There is room also for appropriate recognition of usage agreed by merchants in trade codes.

58. Subsection b refers to various provisions of the Uniform Commercial Code that define additional terms used in this Act. Unless otherwise expressly indicated, the reference is to the Official Text as of 1998.

SECTION 103. SCOPE; EXCLUSIONS.

(a) [Scope in general.] This [Act] applies to computer information transactions.

(b) [Mixed transactions.] Except for subject matter excluded in subsection (d), if a computer information transaction includes subject matter other than computer information or subject matter excluded under subsection (d), the following rules apply:

(1) [Computer information and goods.] If a transaction includes computer information and goods, this [Act] applies to the part of the transaction involving computer information, informational rights in it, and creation or modification of it. However, if a copy of a computer program is contained in and sold or leased as part of goods, this [Act] applies to the copy and the computer program only if:

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

(B) giving the buyer or lessee of the goods access to or use of the program is ordinarily a material purpose of transactions in goods of the type sold or leased.

(2) [Computer information and motion pictures.] Subject to subsection (d)(3)(A), if a transaction includes an agreement for creating, or for obtaining rights to create, computer information and a motion picture, this [Act] does not apply to the agreement if the dominant character of the agreement is to create or obtain rights to create a motion picture. In all other such agreements, this [Act] does not apply to the part of the agreement that involves a motion picture excluded under subsection (d)(3), but does apply to the computer information.

(3) [All other cases.] In all other cases, this [Act] applies to the entire transaction if the computer information and informational rights, or access to them, is the primary subject matter, but otherwise applies only to the part of the transaction involving computer information, informational rights in it, and creation or modification of it.

(c) [Article 9 governs.] To the extent of a conflict between this [Act] and [Article 9 of the Uniform Commercial Code], [Article 9] governs.

(d) [Exclusions.] This [Act] does not apply to:

(1) a financial services transaction;

(2) an insurance services transaction;

(3) an agreement to create, perform or perform in, include information in, acquire, use, distribute, modify, reproduce, have access to, adapt, make available, transmit, license, or display:

(A) a motion picture or audio or visual programming, other than in (i) a mass-market transaction or (ii) a submission of an idea or information or release of informational rights that may result in making a motion picture or similar information product; or

(B) a sound recording, musical work, or phonorecord as defined or used in Title 17 of the United States Code as of July 1, 1999, or an enhanced sound recording, other than in the submission of an idea or information or release of informational rights that may result in the creation of such material or a similar information product.

(4) a compulsory license;

(5) a contract of employment of an individual, other than an individual hired as an independent contractor to create or modify computer information, unless the independent contractor is a freelancer in the news reporting industry as that term is commonly understood in that industry;

(6) a contract that does not require that information be furnished as computer information or a contract in which, under the agreement, the form of the information as computer information is otherwise insignificant with respect to the primary subject matter of the part of the transaction pertaining to the information;

(7) unless otherwise agreed between the parties in a record:

(A) telecommunications products or services provided pursuant to federal or state tariffs; or

(B) telecommunications products or services provided pursuant to agreements required or permitted to be filed by the service provider with a federal or state authority regulating those services or under pricing subject to approval by a federal or state regulatory authority; or

(8) subject matter within the scope of [Article 3, 4, 4A, 5, [6,] 7, or 8 of the Uniform Commercial Code].

(e) [Definitions.] In this section:

(1) "Audio or visual programming" means audio or visual programming that is provided by broadcast, satellite, or cable, as defined or used in the Communications Act of 1934 and related regulations as they existed on July 1, 1999, or by similar methods of delivery.

(2) "Enhanced sound recording" means a separately identifiable product or service the dominant character of which consists of recorded sounds, but which includes (i) statements or instructions whose purpose is to allow or control the perception, reproduction, or communication of those sounds or (ii) other information, as long as recorded sounds constitute the dominant character of the product or service.

(3) "Motion picture" means:

(A) "motion picture" as defined in Title 17 of the United States Code as of July 1, 1999; or

(B) a separately identifiable product or service the dominant character of which consists of a linear motion picture, but which includes (i) statements or instructions whose purpose is to allow or control the perception, reproduction, or communication of the motion picture or (ii) other information, as long as the motion picture constitutes the dominant character of the product or service.

Definitional Cross References: Section 102: "Agreement"; "Consumer"; "Computer"; "Computer information"; "Computer information transaction"; "Consumer"; "Copy"; "Electronic"; "Financial services transaction"; "Good faith"; "Goods"; "Information"; "Insurance services transaction"; "License"; "Mass-market transaction"; "Party".

Comment

1. General Structure. This section states the scope of this Act. Subsection (a) states the affirmative scope. Subsections (b) and (c) establish rules for transactions where more than one subject matter is involved and not all of the subject matter is within subsection (a). Subsection (d) sets out exclusions from the Act.

2. Transactions in Computer Information. This Act deals with contracts and not property law. It applies to computer information transactions. In a computer information transaction, the transferee seeks the information and contractual rights to use it. Unlike a buyer of goods, a purchaser (e.g., buyer, lessee, or licensee) of computer information has little interest in the diskette or tape that originally contained the information after that information has been loaded into a computer, unless the information remains on that media and nowhere else. Indeed, in online transactions in computer information, there is often no tangible medium at all.

The scope of this Act turns initially on the definition of "computer information transaction." Section 102(11). "Computer information transactions" are agreements that deal with the creation, modification, access to, license, or distribution of computer information. Section 102(a)(11). "Computer information" is information in a form directly capable of being processed by, or obtained from, a computer and any copy, associated documentation, or packaging. Section 102(a)(10). As stated in subsections (b) and (c), if a transaction is a computer information transaction but also involves other subject matter, this Act ordinarily applies only to the aspects of the transaction that involve "computer information."

This Act deals with a variety of transactions central to the information economy where the contractual subject matter is computer information. However, the mere fact that communications about a transaction, such as an application for a loan or employment, are sent or recorded in digital form does not place the transaction within this Act. Thus, a contract for airplane transportation is not a computer information transaction even though the ticket is in digital form. The subject matter is not computer information, but the service - transportation. A contract to create and publish a print book does not become a computer information transaction simply because the author chooses or is required to deliver the work on a computer diskette. Similarly, an insurance policy prepared in digital form is not a computer information transaction; it is a contract for insurance coverage the terms of which are evidenced in digital form. A contract for a digital signature certificate is a contract for certification or identification services, not a contract whose subject matter is the computer information.

a. Contracts to Create or Develop Computer Information. This Act applies to contracts to develop, modify, or create software and other computer information, such as a computer database. Section 102(a)(11). Except as excluded in subsection (d), the Act covers all software development contracts, thus resolving conflicts in prior case law.

b. Computer Programs. This Act applies to transactions involving distribution of, or grant of a right to use, a computer program, whether they involve a license or an unrestricted sale of a copy of a program. Section 102(a)(11). The difference between a license and an unrestricted sale, however, is relevant within the Act. A license may involve either a more substantial retention of rights or a greater transfer of rights than an unrestricted sale of a copy. While most provisions of this Act apply to all transactions within its scope, some are limited solely to licenses. The coverage of each section is explicit in the section.

c. Access and Internet Contracts. This Act applies to access contracts. Section 102(a)(1). This includes Internet and similar systems for access to or use of computer information on a remote system. It generally includes contracts under which data, text or images are provided to licensees by access to the provider's system or location on Internet.

d. Digital Multimedia Works. This Act applies to agreements to create or distribute multimedia works. Section 102(a)(11). Multimedia works are those that, through digital technology, combine multiple forms of authorship and multiple types of information into an integrated, often interactive work. Interactivity is a characteristic of software-based products. For a discussion of what is a multimedia work, see Copyright Office Circular (Multimedia Circular).

e. Data Processing Contracts. This Act covers contracts for data processing or data analysis of computer information. Section 102(a)(1)(11)(41).

3. Transactions Outside the Act. The scope of this Act is limited by the affirmative definitions of "computer information" and "computer information transaction," which exclude print and various other forms of information distribution, and by the exclusions in subsection (d). As a result, the Act leaves unaffected all transactions in the traditional core businesses of non-digital information industries. Whether a magazine, book or newspaper publisher can contractually limit or expand rights of use of information by purchasers of copies and what contract liability arises for print works is outside this Act, as are the following:

• •Sales or leases of goods
• •Contracts for personal services (except computer information development and support agreements)
• •Casual exchanges of information
• •Contracts where computer information is not required by the agreement
• •Employment contracts
• •Contracts where computer information is insignificant (de minimus)
• •Computers, televisions, VCR's, DVD players, or similar goods
• •Financial services transactions
• •Insurance services transactions
• •Contracts for print books, magazines, or newspapers
• •Contracts for sound recordings and musical works
• •Contracts for regulated telecommunications services and products
• •Contracts for motion pictures, broadcast or cable programming (except as in Section 103(b)(d))

This Act applies to contracts and agreements regarding computer information.

4. Mixed Transactions. A computer information transaction may involve computer information and other subject matter. This presents a question of whether all or any part of the transaction is governed by this Act, common law, or an article of the Uniform Commercial Code. The circumstance that a contract is governed by more than one source of contract law is common in modern commerce. For example:

• A contract to produce a motion picture is governed by the common law of services, common law relating to information, labor law, copyright law, and other regulatory law.

• A contract to buy a toaster may be governed by Article 2, common law, consumer law, and various federal or state regulations.

• A contract to develop a multimedia product may be governed by common law of services, of information contracts and of licensing, copyright law, and other intellectual property law.

Indeed, virtually all contracts of all types involve "mixed" law. Thus, the issue is not whether multiple sources of contract law apply, but to what extent this Act applies in lieu of other law. Subsections (b) and (c) address that question based on the issue presented, the type of transaction, and applicable commercial policies.

a. Computer Information and U.C.C. Subject Matter. If a transaction includes computer information and subject matter governed by an article of the Uniform Commercial Code, in the absence of contrary agreement, the general rule is that the rules of the Uniform Commercial Code apply to their subject matter and this Act applies to its subject matter. That rule is stated in subsection (b)(1), subsection (c), and subsection (d)(8). For example, under subsection (d)(8), Uniform Commercial Code Article 8, and not this Act, deals with investment securities, while Articles 4 and 4A, and not this Act, deal with payments, checks, and funds transfers. Under subsection (c), if there is a conflict between a provision of this Act and Article 9 of the Uniform Commercial Code, Article 9 prevails. This preserves uniformity in Article 9's application across a wide variety of personal property financing transactions.

b. Computer Information and Goods. Some transactions include goods and computer information. "Goods" is defined for purposes of this Act in Section 102. Generally, there is no overlap between goods and computer information since computer information and informational rights are not goods. See, e.g., United States v. Stafford, 136 F.3d 1109 (7^th Cir. 1998), cert. den., Allison v. United States, 525 U.S. 849 (1998); Specht v. Netscape Communications Corp., - F.3d -, 2002 WL 31166784 (Fed. Cir. 2002); Fink v. DeClassis 745 F.Supp. 509, 515 (N.D. Ill. 1990) (trademarks, tradenames, advertising, artwork, customer lists, goodwill and licenses are not "goods"). A diskette is a tangible object but the information on the diskette does not become goods simply because it is copied on tangible medium, any more than the information in a book is governed by the law of goods because the book binding and paper may be Article 2 goods. See, e.g., Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9^th Cir. 1991); Grappo v. Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d 427 (2d Cir. 1995); Gilmer v Buena Vista Home Video, Inc., 939 F. Supp. 665 (W.D. Ark. 1996); Architectonics, Inc. v. Control Systems, Inc., 935 F. Supp. 425 (S.D.N.Y. 1996); Cardozo v. True, 342 So.2d 1053 (Fla. Dist.Ct.App.1977), cert. den., 353 So.2d 674 (Fla. 1977).

(1) General Rule. If a transaction involves goods and computer information (e.g., a computer and software), the general rule is that Article 2 or Article 2A applies to the aspect of the transaction pertaining to the sale or lease of goods, but this Act applies to the computer information and aspects of the agreement relating to the creation, modification, access to, or transfer of it. Section 103(b)(1). Each body of law governs as to its own subject matter. Some describe this as a "gravamen of the action" standard. The law applicable to an issue depends on whether the issue pertains to goods or to computer information. A similar distinction exists in copyright law between ownership of a copy and ownership of the copyright. See, e.g., 17 U.S.C. § 202; DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999), cert. den. 528 U.S. 923 (1999).

(2) Exceptions to General Rule: Copy and Documentation. There are exceptions to the general rule's gravamen test. Thus, this Act treats the medium that carries the computer information as part of the computer information and within this Act, whether the medium is a tangible object or electronic. This Act applies to the copy, documentation, and packaging of computer information; these are within the definition of computer information itself. Section 102. They are mere incidents of the transfer of the information.

(3) Exceptions to General Rule: Embedded Programs. If a computer program is embedded and contained in goods, the general rule ordinarily applies. This Act applies to the program, while goods law applies to the goods. In some cases, however, an embedded program is a mere part of the goods and this Act should not apply.

With respect to the materiality standard, this Act excludes a copy of the computer program if the copy is embedded in, inseparable from, and sold or leased as an indistinguishable part of goods.

The standards for determining when this exception to the general rule arise focus on the nature of the goods containing the copy and on the importance of the program and access to it in the transaction in those goods. Thus, for example, this Act does not apply to a copy of a program on a computer chip embedded as part of an automobile engine and sold or leased as an indistinguishable part of the automobile containing the engine. On the other hand, this Act does apply to a copy of a program contained on a computer chip in a computer and transferred along with the computer. Uniform Commercial Code Article 9 (2000 Official Text) addresses a similar issue, but the rules there deal with issues about creating and perfecting security interests under that statute; they are not pertinent to general contract law and are not adopted here.

Subsection (b)(1) sets out the applicable standards under this Act.

First: This Act applies to the computer program and the copy of it if the goods in which the copy is embedded is a computer or a computer peripheral. As stated in Official Comment 7 to Section 102, "computer" should be given a common sense definition. Thus, a commercial choice to distribute a program in embedded form, rather than in a form that requires it to be loaded into a computer or peripheral does not affect the applicability of this Act. For example, software for a medical imaging device that relies on computer program capabilities is within this Act whether the program is embedded in the imaging device or loaded into it after purchase. On the other hand a chip in a toaster that controls the ordinary functions of an ordinary toaster is not a "computer" in a common sense application of the term. Of course, this Act does not apply to the computer, but only to the program (and copy) and other computer information.

Second: If a copy of a computer program is sold or leased as part of goods other than a computer or computer peripheral, this Act applies to the program (and the copy) if giving the buyer or lessee of the goods access to or use of the program is ordinarily a "material purpose" of this type of transaction. If not, this Act does not apply to the copy of the program. While this test may involve close decisions in individual cases, bright line tests are not possible and that result is inevitable as the digital information revolution continues to transform commerce. The blurred nature of the issue of determining whether the embedded program should be treated separately is recognized in other contexts. For example, in reference to tax law determinations, accounting standards refer to whether the program is a mere incident of the goods and recognize that determining when or whether this is true cannot involve a firm line, but rather a factual or contextual determination. See AICPA, Statement of Position 97-2 (1997). The issues for contract law differ from those involved in tax (or secured lending), but the nature of the distinction in each context is not one susceptible to bright line determination.

Materiality is judged on an objective sense, reflecting transactions of the type, rather than the subjective goals or intent of the particular parties. Furthermore, materiality focuses on ordinary transactions in goods of the type. Thus, the fact that a program is contained in and sold or leased as a part of goods that are a small part of a billion dollar transaction involving many other assets does not take it out of this Act if, as to the particular goods or system containing the program, access to the program is material.

The basic issue is whether the program and its capabilities are ordinarily important to the purpose in obtaining the goods. Courts should rely on the aspects of the ordinary commercial context. One issue involves between whom the pertinent part of a transaction occurs. Some transactions involve three parties and two agreements. If goods are sold by a vendor but the buyer must obtain a license from a publisher for use of the program, as to the license between the publisher and buyer, the computer information is clearly material. Beyond that, factors pertaining to whether access to or use of the program is material include the extent to which the computer program's capabilities are a material part of the appeal of the product, the extent to which negotiation focused on that capability, the extent to which the agreement made the program's capacity a separate focus, whether there are significant post-transaction obligations of program support, and the extent to which the program is or could be made available commercially separate and apart from the goods. Compare AICPA, Statement of Position 97-2 (1997). Materiality is ordinarily clear if the program is separately licensed as part of the transaction. A separately licensed program for a digital camera that enables the camera to link to a computer is within this Act. On the other hand, the mere fact that ordinary functions of ordinary goods rely on a program embedded in the goods does not indicate that program is governed by this Act. The braking functions of an automobile may be controlled by embedded programs, but in a retail transaction, the purpose is obtaining the automobile's functionality rather than the program; this Act would not apply to a copy of brake software contained in and sold as part of a car. Upstream contracts to develop or supply the program to the manufacturer, however, are within this Act. A sale of an ordinary television that uses a computer program to preset channels is not in this Act.

c. Computer Information and Subject Matter not within the U.C.C. If a computer information transaction also involves subject matter not governed by the U.C.C. or this Act, the general rule is that this Act applies to its own subject matter, but not to aspects involving the other subject matter. As with respect to the treatment of goods, however, this general principle is tailored to reflect commercial and practical interests in some cases. Subsections (b)(2) and (3) state how to determine the applicability of this Act in such cases. However, this Act never applies to subject matter excluded under subsection (d) unless the parties agree to such coverage.

(1) Motion Picture Rights Contracts. Subsection (b)(2) provides the basic rule applied when the other subject matter involves a motion picture as defined in subsection (f). The rule in subsection (b)(2) must be read in connection with subsection (d)(3)(A).

Under subsection (b)(2), if the dominant character of an agreement is to create or to obtain rights to create a motion picture and that part of the agreement is excluded under subsection (d), this Act does not apply to any part of the agreement. Contracting practices in this part of the motion picture industry follow established, unique patterns. The rule here applies only to the extent that the motion picture aspect of the transaction is excluded under subsection (d)(3)(A). If an agreement is for rights to make a motion picture from the book Tractor Monster, but also includes rights to create a Tractor Monster computer game, this Act does not apply to the agreement at all if the dominant character of the agreement is one for creating or obtaining rights to create the motion picture.

As used here, "dominant character" does not mean merely a material or primary part. It requires more than in the "predominant purpose" test applied by some courts in relation to goods and services. The term refers to the fundamental character of the agreement. The motion picture rights must clearly be the focus of the agreement for both parties; it is not sufficient merely that their value or price ultimately exceeds the value of other aspects of the agreement. Whether motion picture rights are the dominant character is determined by an objective analysis of the circumstances of the transaction and transactions of the particular type. The dominance of motion picture rights must be clear and other rights secondary such that the transaction would not reasonably be viewed as other than as for motion picture rights.

When creating or obtaining rights to create a motion picture comprise the dominant character of the agreement, this Act does not apply. If the motion picture rights are not the dominant character of the agreement or if the contract does not involve creating or rights to create a motion picture, this Act applies to the computer information (e.g., the computer game) and other law applies to the motion picture to the extent excluded under subsection (d)(3)(A). If both computer information and motion picture rights are equally important, the dominant character rule does not apply because neither subject matter comprises the sole dominant character of the agreement; this Act applies to the computer information, while other law applies to the motion picture aspect excluded under subsection (d). Where there is a third subject matter involved (e.g., services or goods), other rules of this subsection apply with respect to the coverage by this Act of the other subject matter.

If a transaction includes several agreements among different parties related to a common goal, the character of each agreement is determined with respect to the particular agreement. For example, an agreement to use encryption or imaging software in a particular project is a software license and that agreement is not affected by the coexistence of a related but separate agreement for motion picture rights. Under general law, the parties can in all cases agree about whether the transaction is or is not governed entirely by this Act.

(2) Other Subject Matter. For other subject matter, the basic gravamen rule generally applies. That basic rule is restated in subsection (b)(3), which also provides for a limited exception to that rule.

If obtaining the computer information or informational rights in it is the primary purpose of the transaction, this Act applies to the entire transaction, except for subject matter excluded by subsection (d). The test asks a court to consider whether the computer information or other subject matter (e.g., services) is the main focus. This adopts, for mixed information and services transactions, a variant of the predominant purpose test used under Article 2 with respect to goods and services. In this Act, however, the test only asks whether this Act should apply to other subject matter. In all cases, this Act will apply to the computer information. The primary purpose test requires less than the dominant character test in subsection (b)(2). In considering whether, under the primary purpose test, this Act should apply to the entire transaction, a court should consider the type of transaction envisioned by the parties. While cases under Article 2 provide guidance, it is appropriate to consider additional factors. Courts should consider the extent to which the transaction as a whole corresponds to the framework of information transactions, such as: 1) the nature of any underlying intellectual property rights involved, including differences in the rights provided for different types of works, 2) the extent to which clear allocation of liability risk is a concern, and 3) the extent to which coverage by this Act of the other subject matter in the transaction will correspond to reasonable expectations of the parties as to how the legal issues should be handled.

The same test applies throughout the various levels of use or distribution, but the results may differ at each level for the same information. For example, a courier company that licenses communications software from a software publisher is engaged in a transaction entirely within this Act. If the courier company provides the software to customers to access data on the location of their packages, the primary purpose may have to do with the services the courier provides. Even then, however, this Act applies to the software. If the software publisher enters into a license with the end user, as between the publisher and the end user, that license is entirely within this Act because the primary purpose of that agreement is the software.

The rules of subsection (b) do not apply if the agreement specifies to what extent this Act governs. If the parties elect coverage under this Act, that agreement generally governs as would an agreement that this Act should not apply at all. Agreement here, as elsewhere, can be found in the express terms of the contract as well as in the usage of trade or course of dealing between the parties, or as inferred from the commercial circumstances of the contracting.

5. Exclusions. Subsection (d) states several exclusions from this Act. They are based on a judgment that rules in this Act should not apply to the excluded subject matter unless the parties so agree, because the excluded transactions are different in type from those covered by this Act or are extensively covered by other contract law or regulations.

a. Core Financial and Insurance Functions. Subsection (d)(1) excludes core banking, payment and financial services activities because they are subject to regulation under federal and other state law. Subsection (d)(2) provides a parallel exclusion for insurance services transactions. Also, payment and similar functions are largely within the scope of the U.C.C. and thus outside UCITA.

Similar considerations apply for insurance services transactions in that they are subject to extensive regulation and separately developed law. In addition, these insurance transactions deal with insurance coverage and payment matters, rather than with computer information as the focus. The exclusion of insurance transactions refers to agreements between insurer and insured relating to access to, use, transfer, clearance, settlement, or processing of the policy or contract, or payments or rights to payment under it.

"Financial services transaction" is defined in Section 102. Financial services transactions are similar in many ways to computer information transactions in that they entail trade in symbols, albeit symbols of very different use and effect, and share some common legal issues: e.g., authenticity, data integrity, and authority. See Section 102, comment 26. However, they will often be governed by very different rules in that, in many cases, the digital subject matter of a financial transaction is the value it represents. An appropriate book entry, for example, is a securities entitlement. UCC § 8-501(b)(1)(1998 Official Text). Also, core financial services practices are mature subjects of other bodies of law, such as UCC Articles 3, 4, 4A, 5, 7, 8 and UCC Article 9. For all of these reasons it was deemed essential to exclude financial services transactions from the scope of this Act and to define financial services transaction broadly.

The exclusion under subsection (d)(1) does not exclude banks as entities. Many financial services regulations (e.g., Regulation E of the Board of Governors of the Federal Reserve System) do not apply solely to banks but to any holder of a qualifying account. To the extent that non-banks engage in the activities covered by the exclusion, those activities are excluded from this Act. On the other hand, banks engage as licensors and as licensees in many computer information transactions; those transactions, if not covered by this exclusion, are within this Act. Examples include licensing computer software and contracts providing on-line shopping and access to third-party databases. Where a bank provides software to a customer to be used in part in online access, this Act would govern the software license except to the extent the issue involves questions excluded by this subsection or dealt with in an article of the U.C.C., such as Article 4A, or in preemptive federal law.

b. Telecommunication Services. Subsection (d)(7) excludes regulated telecommunications products and services, and such products and services that are subject to filing or approval procedures as stated in subsection (d)(7)(B). The latter refers to interconnection and similar agreements that are subject to regulatory overview. Overall, the exclusion reflects the existence of extensive state and federal regulations. These telecommunications services would most likely not be included within the definition of a computer information transaction, but the exclusion makes that result clear. The exclusion does not apply to contracts to acquire software for use in telecommunications, nor does it apply to non-regulated information services.

c. Core Entertainment, Cable and Broadcast. Subsection (d)(3) excludes many agreements relating to motion pictures and broadcast and cable programming, in addition to agreements relating to musical works, sound recordings and enhanced sound recordings. The exclusion covers contracts regarding the traditional core activities of these information industries or, in the case of enhanced sound recordings, a enhanced version of a traditional activity. It is intended to be comprehensive as to the excluded activities. The exclusion leaves contract issues to other law with respect to the excluded subject matter.

Business practices in reference to these excluded transactions differ substantially from practices involving computer information. However, this is not an industry exclusion. To the extent that motion picture, broadcast and other covered companies engage in software licensing or other forms of computer information transactions that are not excluded, this Act applies. Also, the exclusion does not apply to contract issues pertaining to submission of information or ideas, or to releases of informational property rights. Here, practices are similar and it is often impractical to distinguish between an idea or a release in terms of whether it is associated with one or another type of informational work. Coverage of all such transactions reflects these factors.

Also, the exclusion does not apply to mass-market transactions involving audio-visual programming or motion pictures. The information industries are rapidly converging and, for those engaged in computer information based transactions, the convergence is most pronounced in the mass market. Limiting the exclusion with respect to such transactions reduces the circumstances in which potentially artificial distinctions are drawn between digital information products.

The exclusions in subsection (d)(3) include agreements to create, perform or include information in the excluded subject matter. To be within the exclusion, both parties must know that the agreement is for a particular work that entails such subject matter. For example, a license generally authorizing use of digital graphics for multiple purposes is not within the exclusion simply because a particular licensee uses the graphics in a motion picture. To be in the exclusion, the agreement must be to include the digital graphics in the motion picture, sound recording or other excluded subject matter. A license for editing or effects software that can be used for multiple purposes, is covered by this Act and not excluded by subsection (d)(3) even if one of its uses is in the creation of a motion picture. Similarly, a software license for use of encryption software generally in products that are motion pictures or sound recordings is not excluded.

The terms "motion picture," "sound recording," "musical work," and "phonorecord" have the meanings associated with those terms in the Copyright Act as of the indicated date and also the meaning set out in subsections (e) and (f). That interpretation applies as of that date for all purposes and with reference to all sources as of that date, including final decisions of courts. The exclusion includes creation or distribution of these works in digital form. The Copyright Act and registration system makes distinctions among and between various types of works, such as audiovisual works, literary works, computer programs, motion pictures, and sound recordings. These distinctions are followed here. The exclusion additionally employs a slightly expanded definition of "motion picture," and a new term, "enhanced sound recording," to cover digital products that have elements beyond ordinary sound recordings or motion pictures (e.g., a program to allow use of the work), but which do not change the fundamental nature of the work as a sound recording or linear motion picture. In each case, the intent is that including instructions or other information does not affect the exclusion so long as the product's dominant character remains a sound recording or linear motion picture.

The term "enhanced sound recording" encompasses products such as enhanced music CDs, audio DVDs and the products commonly known as music videos. A music video qualifies as an enhanced sound recording because its dominant character consists of recorded sounds, even though it also includes visual depiction of a performance or series of performances of a nondramatic musical work or works. For purposes of this section, a music video is to be distinguished from a motion picture featuring music, a motion picture of a musical play, opera, concert or variety show, or a documentary concerning a recording artist or other music-related subject. A music video is also to be distinguished from audio or visual programming featuring music videos, which is treated under subsection (d)(3)(A).

Multimedia works are within this Act. For purposes of this Act, the term "motion picture" focuses on linear works and does not include an interactive computer game, multimedia product, or similar work, nor does it include audio-visual effects within interactive works. The term does not refer to images or visual motion within another work or within software, such as the animated help feature of a word processing program or images or motion in an interactive computer encyclopedia.

Subsection (d)(3) excludes contracts for audio and visual programming distributed by broadcast, cable, or satellite regardless of whether transmitted in digital or another form, including transmissions analogous to broadcast made through the Internet. See Subsection 103(f) (defining this type of programming). The federal Communications Act and associated regulations define terms associated with this exclusion and the intent is to adopt that terminology as of the indicated date, but not subsequent changes. The terms broadcast and cable programming do not include interactive computer services or similar information services that entail a service, a system, or access software that provides or enables access by multiple users to a computer system or the information provided through or from it. See Washington Revised Code § 19.190.010; America Online, Inc. v. Greatdeals.Net, 49 F.Supp.2d 851 (E.D. Va. 1999) ("any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems offered by libraries or educational institutions."). Agreements for access to Internet and similar information services are not covered by the exclusion. Similarly, the term "programming" does not refer to software or computer programs as they may be programmed by a licensor.

d. Compulsory Licenses. Subsection (d)(4) excludes compulsory licenses pursuant to the Copyright Act and similar statutes. These transactions are not voluntary contractual relationships and the contract principles which underlie this Act are not appropriate.

e. Employment Contracts. This Act does not deal with employee contracts. Subsection (d)(5). A vast network of labor law and other regulatory rules apply to the relationship between an employee and employer; this Act leaves that law unchanged. As the second clause of subsection (d)(5) makes clear, however, this Act does apply to computer information contracts involving independent contractors other than freelancers in the news reporting industry as that term is commonly understood in the news reporting industry. Freelancers play an important role in reporting news, including news gathering, dissemination, comment, and feature or general interest reporting and traditionally their relationship with publishers has been governed by applicable state and federal law. Subjecting them to a new set of rules may inject uncertainty into the marketplace, particularly concerning whether the Act applies to a particular transaction. Subsection (d)(5) is designed to exempt the transactions involving these freelancers and their publishers so as not do disturb industry practices in this regard.

f. Voluntary Use of Computer Information. Under Subsection (d)(6) an agreement is not brought into this Act merely because one party elects to use computer information to transmit information to the other, when not required to do so. An author that contracts to submit an article to a publisher for publication in a print journal and elects to send the text by E-mail, does not thereby bring the contract into this Act. A developer allowed by agreement to deliver information in any form it chooses, including print, is not within this Act merely because it elects to use digital systems,

g. Form is Insignificant. There may be cases in which the form of the information as computer information is such a minor part of the transaction that the Act should not apply at all. Subsection (d)(6) provides a court with the basis to reach this judgment if the form of the information as computer information is insignificant. This is a narrow exception, applicable only if the form of the information, as compared to the information itself, is trivial. The exception does not ask a court to compare the cost or value of the computer information to the cost or value of the overall transaction.

What must be insignificant is that the information is in the form of computer information as contrasted to another form, such as in written form. If the information could not be provided in any other form under the agreement and still fulfill the purpose of the agreement with respect to it, the form can never be insignificant, such as where the computer information is a computer operating system. This is true even if the software is provided in a transaction for goods that in cost far exceed the value of the software. To function as an operating system under the agreement, the form can never be insignificant. Similarly, if a party acquires a billion dollar robotics system involving robots and computers along with software that operates each, the fact that the price of the software is small as compared to the billion dollar total deal does not exclude coverage of this Act over the software aspect of the agreement. Rather, the form of the information as computer information in this transaction is essential to the agreement because the software must be in a form to operate the computer and robots.

SECTION 104. CONSUMER PROTECTION LAW GOVERNS.

(a) [ Consumer protection law defined.] In this section, "consumer protection law" means a consumer protection statute, rule, or regulation, or other state executive or legislative action that has the effect of law and any applicable judicial or administrative decisions interpreting those statutes, rules, regulations, or actions.

(b) [Applicable consumer laws prevail.] Except as otherwise provided in this section, this [Act] does not limit, modify, or supersede a consumer protection law.

(c) [ Standard of conspicuousness.] If a consumer protection law requires a term to be conspicuous, the standard of conspicuousness under the consumer protection law applies. However, a provision in the consumer protection law requiring a term to be conspicuous does not preclude the term from being presented electronically.

(d) [ Required writing or signature.] Subject to Section 905, if a consumer protection law requires a writing or a signature, a record or an authentication suffices.

(e) [Required assent.] If a consumer protection law addresses assent, consent, or manifestation of assent, the standard of assent, consent, or manifestation of assent under the consumer protection law applies and, subject to Section 905, may be accomplished electronically.

(f) [Determination of applicability of consumer protection law.] The applicability of a consumer protection law is determined by that law as it would have applied in the absence of this [Act].

[(g) [Applicable consumer protection statutes.] Among the consumer protection laws of this State which apply to the subject matter of this [Act] are: [Insert statutes that, on review by the legislature and amendment as appropriate, are determined to be applicable to the subject matter of this [Act] such as a state's unfair and deceptive practices act with amendments as appropriate.]]

Legislative Note: This Section makes clear that this [Act] does not change a "consumer protection law". Some consumer protection statutes apply to goods and services and may not apply to computer information which is an intangible under current law. Accordingly, states must review their consumer protection statutes to determine if they should be applied to computer information and, if so, what amendments are required to adapt them to that subject matter. In most cases, the state's unfair and deceptive practices act should apply, but some modification may be required. For example, if a state's "unfair acts and practices" statute requires the origin of the product to be specified on the "label or package," such a provision needs consideration before being applied to electronic information that has no "label" or "package." It may also be appropriate to consider such issues as whether the provision should apply to computer information for which no charge is made, or how the provision can be applied to products having multiple "origins" such as software written by an unaffiliated community of programmers. A consumer protection statute applicable to health club contracts may not apply but a consumer protection statute requiring that a vendor's refund policy be posted on the "premises" might apply if amended to allow compliance in an Internet or other electronic environment. Amendments of consumer protection laws must be consistent with the federal Electronic Signatures in Global and Electronic Commerce Act which requires technological neutrality and that the amended statute reference the federal act.

Definitional Cross-References: Section 102: "Authentication"; "Conspicuous"; "Consumer"; "Electronic"; "Record"; "State"; "Term". Section 112, "Manifestation of assent".

Comment

1. Scope of the Section. This section describes the relationship of this Act to a state's consumer protection law. The rule is that this Act does not alter the scope, applicability, or substantive effect of consumer protection laws.

2. Consumer Law Controls. This Act does not alter the scope, applicability, or substantive effect of consumer protection laws. In cases of conflict, the consumer protection law controls. However, consistent with the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001 et. seq., this section permits commerce in electronic form including in consumer cases.

This Act deals with general contract law. It does not promulgate a consumer protection code, although the Act does contain numerous consumer protections. This Act leaves further consumer protection concepts to the consumer protection law of the particular State. This approach is consistent with the approach of other general uniform law, including UCC Article 2 and Article 9, which defer to consumer protection laws. Historically, consumer protection statutes have varied State-by-State. Except for the limited e-commerce rules in this section, a State's consumer protection statutes trump this Act whenever a conflict arises. For example, consumer protection statutes regulating advertising, mandating disclosure of the licensor's main business office, requiring disclosure of a term in specified manner, typeface or the like, or providing for treble damages for particular acts, are not altered by this Act and their provisions over-ride any inconsistent rule contained in this Act.

A "consumer protection law" reflects the judgment of the State's legislature expressed through statutes, or of the State's regulatory agencies or executives expressed through regulations or equivalent actions, that a consumer should receive special protection. A statute or a provision thereof can be fairly described as a consumer protection statute only if it contains protections or rights specifically earmarked for or primarily intended to apply to consumers and that gives consumers greater protection than other parties in similar transactions. The term includes judicial or regulatory interpretations of such laws. While this Act defers to such determinations, the term does not include common law rules that are judicial in derivation.

3. Standard of Conspicuousness. Some consumer protection laws require that particular terms be displayed in a conspicuous manner. Subsection (c) makes clear that, as to such laws, the general principle that this Act defers to consumer protection law includes deference to how those laws interpret or define "conspicuousness" with reference to that requirement; the second sentence of subsection (c) provides a limited exception needed for electronic commerce. In cases where a conspicuousness requirement arises solely from this Act or where there is no standard in or pertaining to the consumer protection law, the definition of conspicuous under this Act controls.

4. Records and Authentication. Subsection (d) confirms an electronic commerce principle that is widely accepted nationally: electronic signatures and records suffice to meet requirements of a writing or a signature in most laws, including most consumer protection laws. The reference to Section 905 is intended to bring in applicable federal procedural requirements for obtaining a consumer's consent to substitute electronic disclosures for those required by law to be delivered in writing and to make it clear that this Act does not alter the provisions of other law on use of electronics for certain forms of notices if they apply to transactions covered by this Act. See 15 U.S.C. §§ 7001(c), 7003(b).

5. Assent. Subsection (e) confirms that the basic principle making consumer protection laws controlling applies to cases where those laws establish requirements of assent and the like. That principle is subject to the rule that assent can be made electronically. In turn, when the limitations spelled out in federal law for consumer "written" disclosure laws and some notice rules apply, the UCITA rule is subject to the applicable federal rule.

6. Applicability of Consumer Protection Law. The effect of the principle that consumer protection laws trump this Act depends on how those laws define their scope. Subsection (f) makes clear that this Act does not alter the scope of any consumer protection law, including any law giving regulatory jurisdiction to a particular state agency. Thus, a consumer protection law applicable to "services" applies to any service transactions within the scope of this Act to the same extent and without any change as it would have applied without enactment of this Act. If courts or regulators interpreted that statute to cover online services before enactment of this Act, that interpretation remains effective as to such services in this Act. If no prior interpretations were made on that issue, or if the issue of scope of the consumer protection law does arise, then that issue should be resolved by considering the policies, language and content of that consumer protection law, not this Act. The same analysis applies to a consumer protection statute that applies to "goods." The meaning of that scope requires analysis of that statute and its policies; this Act does not alter that analysis.

Subsection (f) also recognizes that many consumer protection laws do not by their terms cover transactions within this Act. It would be inappropriate and beyond the prerogative of this or any Act to amend all of those laws automatically to apply to the subject matter of this Act, because many deal with particular circumstances that are not relevant to computer information transactions. Subsection (f) invites legislatures to undertake an analysis that must occur with or without enactment of this Act - an analysis to determine whether or which consumer protection laws in a state should be amended expressly to apply to the subject matter covered here and whether and what other changes need to be made to the consumer protection laws given that coverage. If a State elects to undertake this analysis, subsection (f) signals that any list included is not exclusive.

SECTION 105. RELATION TO FEDERAL LAW; FUNDAMENTAL PUBLIC POLICY; LAWFUL PUBLIC COMMENT; TRANSACTIONS SUBJECT TO OTHER STATE LAW.

(a) [Federal preemption.] A provision of this [Act] which is preempted by federal law is unenforceable to the extent of the preemption.

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

(c) [Lawful public comment not prohibited.] In a transaction in which a copy of computer information in its final form is made generally available, a term of a contract is unenforceable to the extent that the term prohibits an end-user licensee from engaging in otherwise lawful public discussion relating to the computer information. However, this subsection does not preclude enforcement of a term that establishes or enforces rights under trade secret, trademark, defamation, commercial disparagement, or other laws. This subsection does not alter the applicability of subsection (b) to any term not rendered unenforceable under this subsection.

(d) [ Intellectual property notices.] This [Act] does not apply to an intellectual property notice that is based solely on intellectual property rights and is not part of a contract. The effect of such a notice is determined by law other than this [Act].

[(e) [ Conflicting laws that prevail.] The following laws govern in the case of a conflict between this [Act] and the other law: [List laws establishing a digital signature and similar form of attribution procedure.]]

Uniform Law Source: None.

Definitional Cross References: Section 102: "Agreement"; "Computer information" "Contract"; "Information"; "Informational Rights"; "Term".

Comment

1. General Principle and Scope of the Section. Subsections (a) and (b) clarify that this Act does not alter intellectual property or other fundamental information laws. Subsection (c) provides for invalidation of certain contract terms. Subsection (d) clarifies the treatment of non-contractual notices.

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

Balancing the rights of owners of information against the claims of those who want access is complex and has been the subject of considerable controversy and negotiation at both the federal level and internationally. The extent to which the resolution of these issues at the federal level ought to preempt state law is beyond the scope of this Act, the central purpose of which is to facilitate private transactions in information. Moreover, it is clear that limitations on the information property rights of owners that may exist in a copyright regime, where rights are good against third parties, may be inappropriate in a contractual setting where courts should be reluctant to set aside terms of a contract. Subsections (a) and (b) strike the balance between fundamental interests in contract freedom and fundamental public policies such as those regarding innovation, competition, and free expression. The use of these general principles will enable the courts to react to changing practices and technology; more specific prohibitions would lack flexibility and would inevitably fail to cover all relevant contingencies.

2. Federal Law: Preemption. Subsection (a) states a rule that would apply in any event under federal law. If federal law invalidates a state contract law rule or contract term, federal law controls. See, e.g., Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996) (patent license not transferable); Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright license not transferable); SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9th Cir. 1989) and Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corporation, 284 F3d 1323 (2002) (UCC bona fide purchaser doctrine not appropriate for non-exclusive licensees).

A contract term that varies the effect of a rule whose effect between the parties cannot be varied by agreement under the Copyright Act is unenforceable. Subsection (a) refers to preemption, but other doctrines grounded in federal law may preclude enforcement of some contract terms in some cases. Except for rules that directly regulate specific contract terms, no general preemption of contracting arises under copyright or patent law. See National Car Rental System, Inc. v. Computer Associates Int'l, Inc., 991 F.2d 426 (8th Cir. 1993); ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), cert. den., 510 U.S. 861 (1993). Case law will continue to develop in this area. As state law, this Act does not define whether or when federal preemption may occur.

3. Public Policy Invalidation. Contract terms may be unenforceable because of federal preemption under subsection (a) of this section or because they are unconscionable under Section 111. In addition, subsection (b) sets out the legal principle that terms may be unenforceable if they violate a fundamental public policy that clearly overrides the policy favoring enforcement of private transactions as between the parties. The principle that courts may invalidate a term of a contract on public policy grounds is recognized at common law and in the Restatement (Second) of Contracts § 178 et. seq. See, e.g., Livingston v. Tapscott, 585 So. 2d 839 (Ala. 1991); Occidental Sav. & Loan Ass'n v. Venco Partnership, 293 N.W.2d 843 (Neb. 1980).

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

The offsetting public policies most likely to apply to transactions within this Act are those relating to innovation, competition, fair comment and fair use. Innovation policy recognizes the need for a balance between protecting property interests in information to encourage its creation and the importance of a rich public domain upon which most innovation ultimately depends. Competition policy prevents unreasonable restraints on publicly available information in order to protect competition. Rights of free expression may include the right of persons to comment, whether positively or negatively, on the character or quality of information in the marketplace. Free expression and the public interest in supporting public domain use of published information also underlie fair use as a restraint on information property rights. Fair use doctrine is established by Congress in the Copyright Act. Its application and the policy of fair use is one for consideration and determination there. However, to the extent that Congress has established policies on fair use, those can taken into consideration under this section.

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

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

A term or contract that results from an agreement between commercial parties should be presumed to be valid and a heavy burden of proof should be imposed on the party seeking to escape the terms of the agreement under subsection (b). This Act and general contract law also recognize the commercial necessity of enforcing standard-form agreements mass-market transactions. 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 do not offend over-riding fundamental public policy.

Even in mass-market transactions, however, limitations in a license, such as terms that prohibit the licensee from making multiple copies, or that prohibit the licensee or others from using the information for commercial purposes, or that limit the number of users authorized to access the information, or that prohibit the modification of software or informational content without the licensor's permission are typically enforceable. See, e.g., Storm Impact, Inc. v. Software of the Month Club, 13 F.Supp.2d 782 (N.D. Ill. 1998) ("no commercial use" restriction in an on-line contract). On the other hand, terms in a mass-market license that prohibit persons from observing the visible operations or visible characteristics of software and using the observations to develop non-infringing commercial products, that prohibit quotation of limited material for purposes of education or criticism, or that preclude a non-profit library licensee from making an archival (back-up) copy would ordinarily be invalid in the absence of a showing of significant commercial need.

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

In part because of the transformations caused by digital information, many areas of public information policy are in flux and subject to extensive debate. In several instances these debates are conducted within the domain of copyright or patent laws, such as whether copying a copyrighted work for purposes of reverse engineering is an infringement. This Act does not address these issues of national intellectual property policy, but how they are resolved may be instructive to courts in applying this subsection. One national statement of policy on the relationship between reverse engineering, security testing, and copyright in digital information can be found at 17 U.S.C. § 1201 (1999). It recognizes a policy not to prohibit some forms of reverse engineering and also to protect security testing where it is needed to protect the integrity and security of computers, computer systems or computer networks. 17 U.S.C. § 1201(j)(1999) ("the term "security testing" means accessing a computer, computer system, or computer network, solely for the purpose of good faith testing, investigating, or correcting, a security flaw or vulnerability, with the authorization of the owner or operator of such computer, computer system, or computer network . . . [It] is not a violation . . . for a person to develop, produce, distribute or employ technological means for the sole purpose of performing the acts of security testing"). This policy may or may not outweigh a contract term to the contrary. See Section 118 for provisions dealing with reverse engineering for purposes of interoperability and Official Comment 3 to that section.With reference to contract law policies that regulate the bargain of the parties, this Act makes express public policy choices. Contract law issues such as contract formation, creation and disclaimer of warranties, measuring and limiting damages, basic contractual obligations, contractual background rules, the effect of contractual choice, risk of loss, and the like, including the right of parties to alter the effect of the terms of this Act by their agreement should not be invalidated under subsection (b) of this section. This subsection deals with policies that implicate the broader public interest and the balance between enforcing private transactions and the need to protect the public domain of information.

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

4. Terms Prohibiting Public Comment. The rule in this subsection invalidates certain contractual terms that prohibit public comment about the performance of computer information, if the copy of the information has been made generally available to the public in its final form, such as when a licensor releases to the retail market a word processing program. Such terms are invalid unless the term is supported by other law, such as the law of trade secrets, trademark, unfair competition and the like. The term is also enforceable to the extent the term precludes otherwise unlawful comment.

Under this provision there are cases where a party can validly, by contract, agree not to comment about, use, or disclose information except as provided by agreement. Nondisclosure and no-discussion terms may be important for trade secrecy, trademark, unfair competition and other law. Enforcing such terms is central to establishing and retaining valuable rights and provides a foundation for much of modern practice involving technology. This subsection does not disturb such contracting practices, including practices that contractually restrict disclosure or comment. It does not apply unless the information is made generally available; thus, it would not apply to ordinary trade secret and limited distribution transactions.

The policy behind this subsection is this: if the person that owns or controls rights in the information decides that it is ready for general distribution to the public, the decision to place it in the general stream of commerce places it into an arena in which persons who use the product have a strong public interest in public discussion about it. This subsection recognizes that those public interests outweigh interests in enforcing the contract term in appropriate cases. It thus applies only if there was an authorized distribution in final form. "Final form" does not include distribution of pre-test or so-called "beta" or other test versions, such as where the intent of the distribution is to collect information to make further improvements and nondisclosure rules are important to obtaining feedback without exposing the potential product to premature public discussion and criticism. Once generally released in final form, however, a product does not lose that character simply because further versions of it may be developed and released in the future. A product is in final form for purposes of this section when it has been generally released in the marketplace. "End-user licensee" reflects the intent of this subsection not to disturb relationships between manufacturers and distributors where application of such a rule could have unintended consequences. In cases where the license involves a company or other legal entity, the term includes the named entity and any individuals authorized to use the computer information under that license.

5. Non-Contractual, Intellectual Property Notices. Subsection (d) clarifies that this Act does not apply to copyright or other intellectual property notices that are not a contract. This Act applies to agreements and contracts. Thus, the Act does not apply if an academic physicist in Houston creates program code and makes it freely available to other academics or individuals as a way of contributing to the development of so-called "free software" or "open source" software. Non-contractual conduct is not covered by this Act.

A closer question exists if a party makes software available subject to limits on its use which may or may not be interpreted as involving contractual obligations. This Act does not take a position on whether or not intellectual property notices in any particular context are contractual in nature. This Act does not apply to non-contractual relationships. The effect of an intellectual property notice that is not part of a contract is governed by other law and this Act takes no position on what that law is or its effect.

6. Digital And Electronic Signature Statutes. Subsection (e) allows States with existing laws regarding digital signature, electronic signatures, and other similar statutes, which attribute acts or performances of a party in computer information transactions, to list any provisions of such statutes that the State desires to have prevail over this Act in the case of a conflict. For example, many such statutes do not provide a consumer defense of the type provided in Section 213 of this Act. If a State wishes to afford consumers the protections of Section 213, it should not list its other statute or should otherwise craft an appropriate exception. It is not necessary to list the Uniform Electronic Transactions Act because, by its terms, that Act does not apply if UCITA applies.

SECTION 106. RULES OF CONSTRUCTION.

(a) [ Liberal construction and application.] This [Act] must be liberally construed and applied to promote its underlying purposes and policies to:

(1) support and facilitate the realization of the full potential of computer information transactions;

(2) clarify the law governing computer information transactions;

(3) enable expanding commercial practice in computer information transactions by commercial usage and agreement of the parties;

(4) promote uniformity of the law with respect to the subject matter of this [Act] among States that enact it; and

(5) permit the continued expansion of commercial practices in the excluded transactions through custom, usage, and agreement of the parties.

(b) [Construction of mandatory language.] Except as otherwise provided in Section 113(a), the use of mandatory language or the absence of a phrase such as "unless otherwise agreed" in a provision of this [Act] does not preclude the parties from varying the effect of the provision by agreement.

(c) [No negative inference.] The fact that a provision of this [Act] imposes a condition for a result does not by itself mean that the absence of that condition yields a different result.

(d) [When special formalities required.] To be enforceable, a term need not be conspicuous, negotiated, or expressly assented or agreed to, unless this [Act] expressly so requires.

(e) [Headings.] Section headings are part of this [Act], but subsection headings and paragraph headings are not.

Uniform Law Source: Uniform Commercial Code § 1-102(1)(2)(4).

Definitional Cross References: Section 102: "Agreement"; "Computer information transaction"; "Conspicuous"; "Contract"; "Electronic"; "Party"; "Term".

Comment

1. Scope of the Section. This section brings together rules regarding construction of this Act.

2. Purpose of the Act. This Act must be construed in light of its purposes. As stated in paragraph (1), these are not regulatory, but are intended to facilitate and support commercial practice and to support its evolution through agreement and trade practices. To construe an Act in light of its purposes does not mean that general purposes supplant specific provisions. However, in cases of uncertainty, the meaning of this Act should be construed by reference to the stated purposes and the themes developed in the Act, as opposed to inconsistent or extraneous contract law policies that contradict those of this Act.

3. Mandatory Language. This Act ordinarily does not use phrases such as "unless otherwise agreed" and frequently uses mandatory language such as "shall" or "must." However, neither drafting style alters the basic rule that the agreement controls in all cases, except as indicated in Section 115(b). Paragraph (2) rejects decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995) (absence of language allowing variance by agreement indicates provision is mandatory). The agreement, including trade usage and the like, also controls the meaning of language parties use in their contract. For example, an agreement may state that a party may "terminate" for breach. The Uniform Commercial Code and this Act define "termination" as ending a contract without breach. The proper interpretation of the agreement is based on its context and whether use of the term corresponds to a cancellation or termination under this Act.

4. Negative Inference. Paragraph (3) resolves issues about the existence of a negative pregnant. In this Act, the statement of an affirmative result that occurs when certain conditions are met does not necessarily indicate that a different result occurs if the conditions are not met. Thus, if a provision states: "If the originator of a message requests acknowledgment, the following rules apply: ---", this does not indicate what rule governs in the absence of a request. Similarly, a provision that states that particular language or procedure yields a specific result does not indicate what result occurs with different language or procedures. It merely states the affirmative proposition. If a different interpretation is intended, that different interpretation is made explicit in the section.

5. Headings. Subsection (e) follows the UCC rule that sections headings are part of the Act, but subsection headings are not.

SECTION 107. LEGAL RECOGNITION OF ELECTRONIC RECORD AND AUTHENTICATION; USE OF ELECTRONIC AGENTS.

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

(b) [Use of electronics not required.] This [Act] does not require that a record or authentication be generated, stored, sent, received, or otherwise processed by electronic means or in electronic form.

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

(d) [Party bound by electronic agent.] A person that uses an electronic agent that it has selected for making an authentication, performance, or agreement, including manifestation of assent, is bound by the operations of the electronic agent, even if no individual was aware of or reviewed the agent's operations or the results of the operations.

Definitional Cross References: Section 102: "Agreement"; "Authentication"; "Electronic"; "Electronic agent"; "Person"; "Record"; "Receive"; "Sent". Section 112: "Manifestation of assent".

Comment

1. Scope of Section. This section states that statutes pertaining to subject matter within this Act requiring a "writing" or "signature" must be interpreted and applied as allowing a "record" or "authentication." The rules apply only to transactions within this Act, whether by agreement or otherwise.

2. Equivalence of Electronics. Under subsection (a), the fact that a message, record or authentication is electronic does not alter its legal impact. This establishes an equivalence between electronic and other records. The rule refers to the form of the authentication or record, not to its content. See Section 104(4). Subsection (a) does not address how to prove attribution or authentication, nor does it alter evidence law relating to when an original copy of a record is required or what, in a digital world, constitutes an original.

3. Requiring Electronics. Nothing in this Act requires parties to use electronic processes. Subsection (b). In some cases, parties may wish to require use of paper documents; this Act does not alter that choice. It merely establishes a legal framework for electronic commerce in which electronics and paper records are equivalent in law. Parties may decide to use, or not to use, that framework.

4. Establishing requirements. Subsection (c) makes clear that parties can set their own requirements regarding the acceptability of records or authentication. This does not authorize one party unilaterally to change requirements previously established by agreement. Also, subsection (c) does not require that the parties establish requirements regarding electronics - it simply clarifies that they may if they so choose. A person can insist on conformance with requirements that are offered or agreed. Thus, while typing one's name with the requisite intent may be an authentication under this Act, parties can require a different form of authentication, such as a digital signature using encryption. Nothing in this Act disturbs their ability to so contract. Ordinary standards of waiver, estoppel and the like, along with general rules of offer and acceptance, provide standards for dealing with issues that might arise in this context.

5. Electronic Agents. Operations of an electronic agent generally bind the party that used the electronic agent for that purpose. Subsection (d). This rule is limited to situations where the party selects the agent, and includes cases where the party consciously elects to employ the agent on its own behalf, whether that agent was created by it, licensed from another, or otherwise adopted for this purpose. The term "selects" does not require a choice from among several electronic agents, but merely a conscious decision to use a particular agent.

The concept here embodies principles like those in agency law, but it does not depend on agency law. The electronic agent must be operating within its intended purpose. For human agents, this is often described as acting within the scope of authority. Here, the focus is on whether the agent was used for the relevant purpose. For a similar concept in a different context, see Playboy Enterprises, Inc. v. Webbworld, Inc., 991 F. Supp. 543 (N.D. Tex. 1997), aff'd, 168 F.3d 486 (5^th Cir. 1999). Cases of fraud, manipulation and the like are discussed in Section 206.

SECTION 108. PROOF AND EFFECT OF AUTHENTICATION.

(a) [Proving authentication.] Authentication may be proven in any manner, including a showing that a party made use of information or access that could have been available only if it engaged in conduct or operations that authenticated the record or term.

(b) [Commercially reasonable attribution procedure.] Compliance with a commercially reasonable attribution procedure agreed to or adopted by the parties or established by law for authenticating a record authenticates the record as a matter of law.

Definitional Cross References: Section 102: "Attribution procedure"; "Authenticate"; "Information"; "Party"; "Record".

Comment

1. Scope of the Section. This section deals with two issues pertaining to proof of an authentication. It does not address to whom the authentication is attributed.

2. Method of Proof. Proof of authentication can occur in any manner. In electronic commerce, one important means of proving authentication is by showing that a process existed that required an authentication in order to proceed.

3. Authentication Procedure. Under Subsection (b), compliance with an effective or commercially reasonable attribution procedure for authentication confirms that an authentication was intended and occurred. Compliance with such a procedure does not necessarily resolve the issue of to whom the authentication is attributed, but may have weight on that question. See Section 212.

Unless established by law, the procedure must be agreed to or adopted by the parties. This is not limited to instances in which the contracting parties have communicated directly concerning use of an authentication procedure. It includes instances in which one of the contracting parties contracted with a third party offering a digital signature or other procedure with the intent to be bound thereby whenever the signature is affixed to a record and to situations in which a group composed of member companies has adopted attribution procedures to use with other members or assenting third parties.

SECTION 109. CHOICE OF LAW.

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

(b) [Absence of enforceable choice.] In the absence of an enforceable agreement on choice of law, the following rules determine which jurisdiction's law governs in all respects for purposes of contract law:

(1) [Access contracts and electronic delivery.] An access contract or a contract providing for electronic delivery of a copy is governed by the law of the jurisdiction in which the licensor was located when the agreement was entered into.

(2) [Consumer tangible copies.] A consumer contract that requires delivery of a copy on a tangible medium is governed by the law of the jurisdiction in which the copy is or should have been delivered to the consumer.

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

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

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

Uniform Law Source: Restatement (Second) of Conflicts 188. Revised.

Definitional Cross References: Section 102: "Access contract"; "Agreement"; "Consumer"; "Consumer contract"; "Contract"; "Copy"; "Delivery"; "Electronic"; "Licensor"; "Party"; "State"; "Term".

Comment

1. Scope of Section. This section deals with agreed terms selecting applicable law and with what law applies to a transaction in the absence of agreed terms. Subsection (a) enforces the agreement except with respect to mandatory consumer protection rules. Subsections (b) and (c) provides clarity on what law applies in the absence of an enforceable contract term.

2. Contractual Choice of Law. Contract terms that select the law applicable to the contract are routine in commercial agreements. The information economy accentuates their importance because it allows remote parties to enter and perform contracts spanning multiple jurisdictions and in circumstances that do not depend on physical location of either party or the information. Subsection (a) enables small companies to actively engage in multinational business; if the agreement could not designate applicable law, even the smallest business would be subject to the law of all fifty states and all countries in the world. That would impose large costs and uncertainty on an otherwise efficient system of commerce; it would create barriers to entry.

a. General Rule. This Act enforces agreed choices of law. This follows most decisions dealing with information-related contracts. See Medtronic Inc. v. Janss, 729 F.2d 1395 (11^th Cir. 1984); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1^st Cir. 1993). Restatement (Second) of Conflict of Laws § 188 has a similar rule. Subsection (a) does not follow U.C.C. § 1-105 (1998 Official Text) which requires that the selected state have a "reasonable relationship" to the transaction. In a global information economy, limitations of that type are inappropriate, especially in cyberspace where physical locations are often irrelevant or not knowable. Parties may appropriately wish to select a neutral forum because neither is familiar with the law of the other's jurisdiction. In such a case, the chosen state's law may have no relationship at all to the transaction. See White House Report, A Framework for Global Electronic Commerce, July 1, 1997. This rule is consistent with international norms. See Inter-American Convention on the Law Applicable to International Contracts art. 7 (Mexico City 1994); Convention on the Law Applicable to Contracts for the International Sale of Goods art. 7(1) (The Hague 1986).

b. Limitations. Agreed choices of law are subject to limitations such as in the doctrine of unconscionability and the treatment of overriding fundamental public policy of the forum state. Section 105(b); Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4^th 881, 72 Cal. Rptr.2d 73 (Cal. App. 1998). Compare Lowry Computer Products, Inc. v. Head, 984 F. Supp. 1111 (E.D. Mich. 1997).

Subsection (a) further provides that, in a consumer contract, the agreed choice of law cannot override an otherwise applicable rule that could not be altered by agreement under the law of the state whose law would apply in the absence of the contractual choice. The policy of freedom of contract should not permit overriding the consumer rule if a state, having addressed the cost and benefits, determines that the consumer rule is not variable by contract.

3. Choice of Law: No Contract term. Subsection (b) states what choice-of-law rules govern in the absence of a contract term. These rules apply to all contract-related issues and replace common law. Contracts in computer information can be created and performed remotely, a factor emphasizing the need for tailored, understandable rules that enhance certainty and thus facilitate commerce. As to common law, see William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992) ("[C]hoice-of-law theory today is in considerable disarray. [It] is marked by eclecticism and even eccentricity.").

Subsection (b)(1) specifies that, in an access contract or a contract involving electronic delivery of information, in the absence of an agreed choice of law, the agreement is governed by the law of the jurisdiction in which the licensor is located. Any other rule would require that the information provider (small or large) comply with the law of all states and all countries, since it may not be known or knowable where the contract is formed or the information sent. The rule adopted here enhances certainty in a context where an on-line vendor, large or small, makes Internet access available to the entire world. "Located" is defined in subsection (d) and does not depend on the location of the computer that contains the information.

Subsection (b)(2) applies to consumer transactions that involve delivery of tangible (physical) copies. In the absence of agreed terms, the law where the copy is or was to be delivered governs. Thus, if a consumer is to receive delivery of a tangible copy in Chicago, the transaction is subject to the law of Illinois unless the agreement indicates otherwise. This is consistent with current U.S. law and is followed in many European countries. It adopts, for the consumer, the location that is most likely to be consistent with the consumer's expectations. It avoids surprise to the provider because the tangible copy is to be delivered into a known state.

The rules in subsection (b) deal only with contract law. They do not affect tax, copyright, or other fields of law. See Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992); Itar-tass Russian News Agency v. Russian Kurier, Inc., 153 F.3d 82 (2d Cir. 1998); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381 (9^th Cir. 1995).

4. Most Significant Relationship. In the absence of an agreement and except for the rules in subsections (b)(1) and (b)(2), subsection (b)(3) adopts a "most significant relationship" test. The Restatement (Second) of Conflicts of Law uses a similar test; cases interpreting that rule are applicable here. Applying this test requires consideration of factors including the: (a) place of contracting, (b) place of negotiation, (c) place of performance, (d) location of the subject matter of the contract, (e) domicile, residence, nationality, place of incorporation and place of business of one or both parties, (f) needs of the interstate and international systems, (g) relative interests of the forum and other interested states in the determination of the particular issue, (h) protection of justified expectations of the parties, and (i) promotion of certainty, predictability and uniformity of result.

5. Foreign Countries. Subsection (c) does not apply if an enforceable contract term designates what law applies. It deals with cases where the default rules in subsection (b) select the law of a foreign country whose law is substantively inappropriate because it fails to give a party protections substantially similar to those available under this Act. The reference is solely to contract law, including this Act and general contract and related equity law of the jurisdiction. Subsection (c) allows a court to use a different choice of law rule than in (b), but courts should alter the basic rule only in extreme cases. It does not suffice merely that the foreign law is different. The differences must be substantial and adverse.

SECTION 110. CONTRACTUAL CHOICE OF FORUM.

(a) [Limitations on contractual choice.] The parties in their agreement may choose an exclusive judicial or arbitral forum unless the choice is unreasonable or unjust.

(b) [When forum exclusive.] A judicial forum specified in an agreement is not exclusive unless the agreement expressly so provides.

(c) [Decision for court.] The enforceability of an agreed choice of exclusive forum is a question for determination by a court of competent jurisdiction in the state in which the action is brought.

Definitional Cross References: Section 102: "Agreement"; "Party"; "Term".

Comment

1. Scope of the Section. This section deals with agreements choosing an exclusive judicial or arbitral forum.

2. General Rule. Choice of forum agreements are generally enforceable. This rule adopts the approach of Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), and cases following that decision, which form the majority position on this issue in this country, and which treat choice of forum terms as presumptively valid. The Restatement (Second) of Conflicts of Law has a similar rule.

3. Limitations. A choice of an exclusive forum is not enforceable if it is unreasonable or unjust; the term also is not enforceable if it is unconscionable under Section 111. The "unreasonable or unjust" standard follows Breman and its progeny and adopts the reasoning of those cases, also applying the standard to choice of arbitral forums. The agreed term is unenforceable if it has no valid commercial purpose and has a severe and unfair impact on the other party. In such cases, the choice is both unreasonable and unjust. This may preclude enforcement of forum agreements that choose an unreasonable forum solely to defeat the other party's ability to contest disputes. Terms may be unreasonable in that they have no commercial purpose or justification other than to defeat the rights of the other party and their impact may be unjust if the term unfairly harms the other party for no sustainable reason. On the other hand, an agreed choice of forum based on a valid commercial purpose is not invalid simply because it adversely affects one party, even if bargaining power was unequal. The burden of establishing that the clause fails lies with the party asserting its invalidity. Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972); Pelleport Investors, Inc. v. Budco Quality Theaters, Inc., 741 F.2d 273 (9th Cir. 1984); Restatement (Second) of Conflicts of Law § 80, comment c (1989 rev.). A party that challenges a choice of forum clause by filing in a forum other than the designated forum does not breach the contract by doing so.

Agreed choices of forum are important in electronic commerce. Court decisions on jurisdiction in the Internet demonstrate the uncertainty about when merely doing business on the Internet exposes a party to jurisdiction in all States and all countries. That uncertainty affects all businesses, but it has greatest impact on small enterprises. Choice of forum agreements serve a significant commercial purpose by allowing parties to control the uncertainty and the cost it creates. See, e.g., Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2nd Cir. 1998); Caspi v. Microsoft Network, L.L.C., 323 N.J.Super. 118, 732 A.2d 528 (N.J. A.D. 1999), cert. den., 162 N.J. 199, 743 A.2d 851 (1999). The Court's discussion in Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991) in a different multi-jurisdictional context is relevant to determining reasonableness in Internet contracting:

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

In electronic commerce, a contractual choice of forum will often be justified on the basis of the risk and uncertainty that would otherwise exist. Choice of a forum at a party's location is ordinarily reasonable.

4. Non-exclusive Forum. Subsection (b) provides that a choice of forum term is nonexclusive unless the agreement expressly provides otherwise. Requiring express exclusivity terms provides notice and follows what, in most cases, is the expectation of the parties. The enforceability of a non-exclusive forum selection clause is not addressed in this Act. Absent unconscionability or other overriding restriction, these clauses present less reason for restricting contract choices than do the clauses dealt with in this section.

5. Forum for Decision. Subsection (c) clarifies the general rule that the enforceability of the forum selection clause will be determined by the forum in which the action is brought. The subsection refers to a decision by a court. In this Act, that term includes an arbitral forum. Thus, this section does not resolve the issue of whether the determination is to be made by a court or an arbitral panel. The forum must be of competent jurisdiction. The subsection does not disturb existing law that determines whether a challenge to a forum selection should be heard by an arbitrator or by a judicial officer. If the action is brought by a consumer in his jurisdiction or if enforcement of a judgment is challenged by the consumer in its jurisdiction,then the consumer's jurisdiction will decide the questions of enforceability of the forum selection clause.

6. Federal Arbitration Act. The federal Arbitration Act provides preemptive federal standards regarding the treatment of arbitration clauses and the enforceability of arbitration remedies. This Act does not alter those preemptive standards.

SECTION 111. UNCONSCIONABLE CONTRACT OR TERM.

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

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

Uniform Law Source: Uniform Commercial Code § 2-302 (1998 Official Text).

Definitional Cross References: Section 102: "Contract"; "Court"; "Term".

Comment

1. Scope of the Section. This section adopts the unconscionability doctrine of Uniform Commercial Code § 2-302 (1998 Official Text).

2. Basic Policy and Effect. This section and Section 117 allow courts to rule directly on the unconscionability of the contract or a particular term. The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the terms involved are so one-sided as to be unconscionable under the circumstances existing at the time the contract was made. The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power. See Intel Corp. v. Integraph, 195 F.3d 1346 (Fed. Cir. 1999). Since its adoption in Article 2 of the U.C.C., the doctrine of unconscionability has received continuing attention from the courts and enables courts to police explicitly against the contracts or clauses which they find to be unconscionable. See, Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y.A.D. 1998). In this Act, the concept requiring an "opportunity to review" establishes a requirement that is not clearly present in common law and that resolves many procedural issues preventing unfair surprise. Section 113, cmt. 2.

3. Electronic commerce. This Act confirms the enforceability of automated contracting involving "electronic agents," but in some cases automation may produce unexpected, potentially oppressive results due to errors in programs, problems in communication, or other unforeseen circumstances in the automation process. Common law concepts of mistake may apply, as may Sections 206 and 213. In addition, in appropriate cases, unconscionability doctrine may invalidate a term because a procedural breakdown in automated contract formation produces unexpected and oppressive results in the terms of the agreement.

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

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

SECTION 112. MANIFESTING ASSENT.

(a) [How person manifests assent.] A person manifests assent to a record or term if the person, acting with knowledge of, or after having an opportunity to review the record or term or a copy of it:

(1) authenticates the record or term with intent to adopt or accept it; or

(2) intentionally engages in conduct or makes statements with reason to know that the other party or its electronic agent may infer from the conduct or statement that the person assents to the record or term.

(b) [How electronic agent manifests assent.] An electronic agent manifests assent to a record or term if, after having an opportunity to review it, the electronic agent:

(1) authenticates the record or term; or

(2) engages in operations that in the circumstances indicate acceptance of the record or term.

(c) [Assent to specific term.] If this [Act] or other law requires assent to a specific term, a manifestation of assent must relate specifically to the term.

(d) [Proof of assent.] Conduct or operations manifesting assent may be proved in any manner, including a showing that a person or an electronic agent obtained or used the information or informational rights and that a procedure existed by which a person or an electronic agent must have engaged in the conduct or operations in order to do so. Proof of compliance with subsection (a)(2) is sufficient if there is conduct that assents and subsequent conduct that reaffirms assent by electronic means.

(e) [Agreement for future transactions.] The effect of this section may be modified by an agreement setting out standards applicable to future transactions between the parties.

(f) [ Online services, network access, and telecommunications services.] Providers of online services, network access, and telecommunications services, or the operators of facilities thereof, do not manifest assent to a contractual relationship simply by their provision of those services to other parties, including, without limitation, transmission, routing, or providing connections; linking; caching; hosting; information location tools; and storage of materials, at the request or initiation of a person other than the service provider.

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

Definitional Cross References: Section 102: "Agreement"; "Authenticate"; "Copy"; "Electronic"; "Electronic agent"; "Delivery"; "Information"; "Informational Rights"; "Knowledge"; "Mass-market license"; "Person"; "Record"; "Return"; "Term". Section 117: "Reason to know".

Comment

1. Scope of Section. This section provides standards for "manifestation of assent." Section 113 deals with the related, important concept of an "opportunity to review". In this Act, having an opportunity to review a record is a precondition to manifesting assent.

2. General Theme. The term "manifesting assent" comes from Restatement (Second) of Contracts § 19. This section corresponds to Restatement § 19, but more fully explicates the concept. Codification establishes uniformity that is lacking in common law.

Restatement (Second) of Contracts §19(1) provides: "The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act." This section adopts that view. Conduct can convey assent as clearly as words. This rule is important in electronic commerce, where most interactions involve conduct rather than words. Subsection (b) adapts that principle to electronic agent contracting.

"Manifesting assent" has several roles: 1) a method by which a party agrees to a contract; 2) a method by which a party adopts terms of a record as the terms of a contract; and 3) if required by this Act, a means of assenting to a particular term. In most cases, the same act accomplishes the results under 1 and 2.

Manifesting assent does not require any specific formality of language or conduct. In this Act, however, to manifest assent to a record or term requires meeting three conditions:

• •First, the person must have knowledge of the record or term or an opportunity to review it before assenting. An opportunity to review requires that the record be available in a manner that ought to call it to the attention of a reasonable person and that readily permits review. Section 113 may also require a right of return if the opportunity to review comes after a person becomes obligated to pay or begins performance.
• •Second, having had an opportunity to review, the person must manifest assent. The person may authenticate the record or term, express assent verbally, or intentionally engage in conduct with reason to know that the conduct indicates assent. Restatement (Second) of Contracts § 19. As in the Restatement this can include a failure to action if the circumstances so indicate.
• •Third, the conduct, statement, or authentication must be attributable in law to the person. General agency law and Section 212 provide standards for attribution.

3. Manifesting Assent.

a. Assent by Statements or Authentication. A person can assent to a record or term by stating or otherwise indicating its assent or by "authenticating" the record or term. Authentication occurs if a party signs a record or does an electronic equivalent. Section 102 (a)(6).

b. Assent by Conduct. Assent occurs if a person acts or fails to act having reason to know its behavior will be viewed by the other party as indicating assent. Whether this occurs depends on the circumstances. As in common law, proof of assent does not require proof of a person's subjective intent or purpose, but focuses on objective indicia, including whether there was an act or a failure to act voluntarily engaged in with reason to know that an inference of assent would be drawn. Actions objectively indicating assent are assent. This follows modern contract law doctrines of objective assent. Doctrines of mistake, fraud, and duress apply in appropriate cases.

Assent does not require that a party be able to negotiate or modify terms, but the assenting behavior must be intentional (voluntary). This same rule prevails in all other contract law. Intentional conduct is satisfied if the alternative of refusing to act exists, even if refusing leaves no alternative source for the computer information. On the other hand, conduct is not assent if it is conduct which the assenting party cannot avoid doing, such as blinking one's eyes. Courts use common sense in applying this standard in common law and will do so under this Act. Actions in a context of a mutual reservation of the right to defer agreement to a contract do not manifest assent; neither party has any reason to believe that its conduct will suggest assent to the other party.

Knowledge that conduct or inaction is assent satisfies this rule. Also, conduct is assent if a person has "reason to know" the conduct will lead the other party to believe that there was assent. Factors that relate to this issue include: the ordinary expectations of similar persons in similar contexts; language on a display, package, or otherwise made available to the party; the fact that the party can decline and return the information, but decides to use it; information communicated before the conduct occurred; and standards and practices of the business, trade or industry of which the person has reason to know.

The "reason to know" standard is not met if the computer information is sent to a recipient unsolicited under terms that purport to create a binding contract by failure to object to the unsolicited sending. In such cases, it is not reasonable for the sending party to infer assent from silence; the threshold for manifesting assent is not met.

c. Assent by Electronic Agents. Assent may occur through automated systems ("electronic agents"). Either or both parties (including consumers) may use electronic agents. For electronic agents, assent cannot be based on knowledge or reason to know, since computer programs are capable of neither and the automated nature of the interaction may mean that no individual is aware of it. Subsection (b) focuses on the electronic agent's acts, not knowledge or reason to know. Assent occurs if the agent's operations were an authentication or if, in the circumstances, the operations indicate assent. In this Act, manifesting assent requires a prior opportunity to review. For an electronic agent, this opportunity occurs only if the record or term was presented in such a way that a reasonably configured electronic agent could react to it. See Section 113(b). The capability of an automated system to react and an assessment of the implications of its actions are the only appropriate measures of assent.

d. Assent to Particular Terms. This Act distinguishes between assent to a record and, when required by this Act or other law, assent to a particular term in a record. Assent to a record encompasses all terms of the record. Section 208. Assent to a particular term, if required, requires acts that specifically relate to that term. This is like a requirement that a party "initial" a clause to make it effective. One act, however, may assent to both the record and the term if the circumstances, including the language of the record, clearly indicate that this is true, such as where assent is clearly indicated as being to the record and to a term the nature of which is made clear to the assenting party.

4. Terms of Agreement. Manifestation of assent to a record is not the only way in which parties establish the terms of their agreement. This Act does not alter recognition in law of other methods of agreeing to terms. For example, a product description can become part of an agreement without manifestation of assent to a record repeating that description; the product description defines the bargain itself. A party that licenses a database of names of "consumer attorneys" need only provide a database of consumer attorneys since this is the bargain; the provider is not required to obtain assent to a record stating that deal. Similarly, the licensee can rely on the fact that the database must contain consumer attorneys, not other lawyers. If a product is clearly identified on the package or in representations to the licensee as for consumer use only, that term is effective without language in a record restating the description or conduct assenting to that record. Of course, if the nature of the product is not obvious and there is no assent or agreement to terms defining it, hidden conditions might not be part of the agreement.

Often, copyright or other intellectual property notices restrict use of a product without needing assent to contract terms. For example, a video rental may place a notice on screen that limits the customer's use such as by precluding commercial public performances. Enforceability of such notices does not depend on obtaining a manifestation of assent.

5. Proof of Assent. Many different acts can establish assent to a contract or a contract term. It is not possible to state them in a statute. In electronic commerce, one important method is by showing that a procedure existed that required an authentication or other assent in order to proceed in an automated system. This is recognized in subsection (d).

Subsection (d) also encourages use of double assent procedures as a reconfirmation showing intentional assent ("intentionally engages in conduct . . . with reason to know"). It makes clear that if the assenting party has an opportunity to confirm or deny assent before proceeding to obtain or use information, confirmation meets the requirement of subsection (a)(2). This does not alter the effectiveness of a single indication of assent. When properly set out with an opportunity to review terms and to make clear that an act such as clicking assent on-screen is assent, a single indication of assent suffices. See Caspi v. Microsoft Network, L.L.C., 323 N.J.Super. 118, 732 A.2d 528 (N.J. A.D. 1999), cert. den., 162 N.J. 199, 743 A.2d 851 (1999); Register.com, Inc., v. Verio, Inc. 126 F.Supp.2d 238 (SD NY 2000).

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

Illustration 2: The first screen of an online stock-quote service requires that the potential licensee enter its name, address and credit card number. After entering the information and striking the "enter" key, the licensee has access to the data and receives a monthly bill. Somewhere below the place to enter the information, but hidden in small print, is the statement: "Terms and conditions of service; disclaimers." The customer's attention is not called to this sentence, nor is the customer asked to react to it. Even though using the service creates a contract, there may be no assent to the terms of service and disclaimer, since there is no act indicating assent to those terms. If there is no assent to those terms, the court would determine contract terms on other grounds, including the rules of this Act and usage of trade.

Illustration 3: The purchasing screen of an on-line software provider provides the terms of the license, a space to indicate the software purchased, and two on-screen buttons indicating "I agree" and "I decline" respectively. A user that completes the order and indicates "I agree" causes the system to move to a second screen. This second screen summarizes the order and asks the user to click, either confirming its order, or canceling it. This satisfies subsection (a)(2) on intentional conduct and reason to know. It also satisfies the error correction procedure in Section 213.

6. Authority to Act. The person manifesting assent must be one that can bind the party seeking the benefits or being charged with the obligations or restrictions of the agreement. In general, this Act treats this issue as a question of attribution: are the assent-producing acts attributable to this particular person? A person that desires to enforce terms against another must establish that it dealt with an individual or agent that had authority to bind the person or, at least, establish that the person to be bound accepted the benefits of the contract or otherwise ratified the acts. If the individual who assented did not have authority and the conduct was not ratified or otherwise adopted, there may be no assent as to the party "represented," but only as to the individual who acted. If this occurs, both the purported principal and the relying party may be at risk: the relying party (e.g., licensor) risks loss of its terms with respect to the party it intended to have bound, while the purported principal ("licensee" using information not obtained by a proper agent) risks that use of the computer information infringes a copyright or patent, since the principal does not have the benefit of the license. There must be an adequate connection between the individual who had the opportunity to review and the one whose acts constitute assent. Of course, a party with authority can delegate that authority to another and such delegation may be either express or implicit. Thus, a CEO may authorize her secretary to agree to a license when the CEO instructs the secretary to sign up for legal materials online or to install a newly acquired program that is subject to an on-screen license.

Questions of this sort arise under agency law as augmented in this Act, such as by the provision on electronic agents in Section 211 or rules in this Act on attribution. Other law governs questions of ordinary agency law, estoppel and the like.

7. Modification of Rules. Subsection (e) recognizes that parties, by prior agreement, may define what constitutes assent with respect to future conduct in ongoing relationships. Compare Section 113(e). The parties may call for more or less formality than set out in this Act. This is important for cases where multiple transfers in electronic commerce occur pursuant to prior agreement. Assent in such cases can just as well be found in the original agreement as in the subsequent conduct.

8. Third Party Service Providers. Assent requires conduct by the party to be bound or its agents. If the party is enabled to reach a system because of services provided by a third party communications or service provider, the service provider typically does not intend or enter into in a contractual relationship with the provider of the information. While the customer's acts may constitute assent by the customer, they do not bind the service provider since the service provider's actions are in the nature of transmissions and enabling access, not assent to a contractual relationship.

Subsection (f) makes clear that service providers - providers of online services, network access, or the operation of facilities thereof - do not manifest assent to a contractual relationship simply from their provision of such services, including but not limited to transmission, routing, providing connections, or linking or storage of material at the request or initiation of a person other than the service provider. If, for example, a telecommunications company provided the routing for a user to reach a particular online location, the fact that the user of the service might assent to a contract at that location does not mean that the service provider has done so. The conduct of the customer does not bind the service provider.

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

SECTION 113. OPPORTUNITY TO REVIEW.

(a) [Manner of availability generally.] A person has an opportunity to review a record or term only if it is made available in a manner that ought to call it to the attention of a reasonable person and permit review.

(b) [ Manner of availability by electronic agent.] An electronic agent has an opportunity to review a record or term only if it is made available in a manner that would enable a reasonably configured electronic agent to react to the record or term.

(c) [When right of return required.] If a record or term is available for review only after a person becomes obligated to pay or begins its performance, the person has an opportunity to review only if it has a right to a return if it rejects the record. However, a right to a return is not required if:

(1) the record proposes a modification of contract or provides particulars of performance under Section 305; or

(2) the primary performance is other than delivery or acceptance of a copy, the agreement is not a mass-market transaction, and the parties at the time of contracting had reason to know that a record or term would be presented after performance, use, or access to the information began.

(d) [Right of return created.] The right to a return under this section may arise by law or agreement.

(e) [Agreement for future transactions.] The effect of this section may be modified by an agreement setting out standards applicable to future transactions between the parties.

Definitional Cross References: Section 102: "Agreement"; "Copy"; "Information"; "Mass-market transaction"; "Record"; "Term".

Comment

1. Scope of this Section. This section sets out the basic standards for when a party has been given an opportunity to review the terms of a record. Unless there is an opportunity to review the record, under Section 112 the party cannot manifest assent to it.

2. Opportunity to Review. A manifestation of assent to a record or term under this Act cannot occur unless there was an opportunity to review the record or term. Common law does not clearly establish this requirement, but the requirement of an opportunity to review terms reasonably made available reflects simple fairness and establishes concepts that curtail procedural aspects of unconscionability. Section 111. For a person, an opportunity to review requires that a record be made available in a manner that ought to call it to the attention of a reasonable person and permit review. See Specht v. Netscape Communications Corp., - F.3d -, 2002 WL 31166784 n. 13 (Fed. Cir. 2002). This requirement is met if the person knows of the record or has reason to know that the record or term exists in a form and location that in the circumstances permit review of it or a copy of it. For an electronic agent, an opportunity to review exists only if the record is one to which a reasonably configured electronic agent could respond. Terms made available for review during an over-the-counter transaction or otherwise in a manner required under federal law give an opportunity to review.

a. Declining to Use the Opportunity to Review. An opportunity to review does not require that the person use that opportunity. The condition is met even if the person does not read or actually review the record. This is not changed because the party desires to complete the transaction rapidly, is under pressure to do so, or because the party has other demands on its attention, unless the one party actively manipulates circumstances to induce the other party not to review the record. Such manipulation may vitiate the alleged opportunity to review.

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

c. Right to Return. If terms in a record are not available until after there is an initial commitment to the transaction, subsection (c) indicates that ordinarily there is no opportunity to review unless the party can return the product (or for a vendor that refuses the other party's terms, recover the product) and receive appropriate reimbursement of payments if it rejects the terms. The return right creates a situation where meaningful assent can occur. The right exists only for the first licensee. If the right to a return is created only by agreement or by an offer from the one party, rather than by law, the right must be communicated to the other person so that the person ought to become aware of it.

Computer information is frequently distributed without charge for the purpose of enabling the recipient to enter into transactions with the licensor. The "beginning of performance" under subsection (c) in such cases is typically not payment, but selection of a password or other attribution procedure or the initiation of a transaction. In such situations, with respect to a right of return, the licensor's obligation is satisfied if it provides instructions on request for destruction or return of the information and, when applicable under Section 209, reimburses the other party for costs, if any. Although the party refusing terms has a reasonable time within which to contact the licensor and destroy the information, it must do so before it uses the information to select a security procedure or initiate a transaction.

There is no distinction between software distributed at a nominal price and software that is competitively priced. Therefore, if a financial or other institution distributes software at a nominal price that enables a customer to manage its personal finances or to engage in transactions with the distributor of the software, it must offer the right of return in the same manner as a company that distributes such at a market price.

The return right provides incentive for a licensor to make the terms of the license available up-front if commercially practicable since this avoids the right of return in this section and in Sections 209 and 613. An additional incentive, under Sections 208 and 209, is that, when presentation of terms is deferred, the terms cannot become part of the contract unless the other party had reason to know that terms would be presented later. A decision to delay presentation of terms without an important commercial reason to do so may result in substantial costs and uncertainty.

Failure to provide a right to return when required does not invalidate the agreement, but creates a risk that the terms will not be assented to by the party to which they were presented. If there is no manifestation of assent to a record, the terms of the agreement are determined by considering all the circumstances, including the expectations of the parties, applicable usage of trade and course of dealing, and the property rights, if any, involved in the transaction. In such cases, courts should be careful to avoid unwarranted forfeiture or unjust enrichment. An agreement with payment and other agreed terms that reflect a right to use information for consumer purposes only cannot be transformed into an unlimited right of commercial use by a failure of assent.

3. Modifications and Layered Contracting. The right to a return provisions do not apply to proposals to modify an agreement or to cases where the agreement gives a party the right to specify particulars of performance. If the contract allows one party unilaterally to alter terms, no further agreement is required for the changed terms to be effective if the term is not unconscionable or otherwise made invalid. If that contractual right does not exist, however, and one party proposes in a record modifications of the contract (that can become effective only on the other person's agreement to them), there must be an opportunity to review the terms before a manifestation of assent pursuant to Section 112.

Similarly, the return right does not apply where parties begin performance in the expectation that a record containing contract terms will be presented and adopted later and the performance is more than merely tendering and accepting an existing copy of computer information. Subsection (c). This is common in software development and other complex contracts; this Act does not disturb that commercial practice.

4. Modification of Rules. Subsection (e) allows parties, by prior agreement, to define what constitutes assent with respect to future conduct in ongoing relationships. The parties may call for more or less formality than set out in this Act. This is important for cases where multiple transfers in electronic commerce occur pursuant to prior agreement. Assent in such cases can just as well be found in the original agreement as in the subsequent conduct.

SECTION 114. PRETRANSACTION DISCLOSURES IN INTERNET-TYPE TRANSACTIONS.

(a) [Scope of section.] This section applies to a licensor that makes its computer information available to a licensee by electronic means from its Internet or similar electronic site.

(b) [Sufficient opportunity to review.] In such a case, the licensor affords an opportunity to review the terms of a standard form license which opportunity satisfies Section 113 with respect to a licensee that acquires the information from that site, if the licensor:

(1) makes the standard terms of the license readily available for review by the licensee before the information is delivered or the licensee becomes obligated to pay, whichever occurs first, by:

(A) displaying prominently and in close proximity to a description of the computer information, or to instructions or steps for acquiring it, the standard terms or a reference to an electronic location from which they can be readily obtained; or

(B) disclosing the availability of the standard terms in a prominent place on the site from which the computer information is offered and promptly furnishing a copy of the standard terms on request before the transfer of the computer information; and

(2) does not take affirmative acts to prevent printing or storage of the standard terms for archival or review purposes by the licensee.

(c) [Other methods of giving opportunity to review.] Failure to provide an opportunity to review under this section does not preclude a person from providing a person an opportunity to review by other means pursuant to Section 113 or law other than this [Act].

Definitional Cross References: Section 102: "Computer information"; "Copy"; "Electronic"; "Information"; "License"; "Licensee"; "Licensor"; "Standard form". Section 113: "Opportunity to review".

Comment

1. Scope of Section. This section deals with pre-transaction disclosures of contract terms in Internet transactions where the contract is formed on-line for an electronic delivery of information.

2. Relation to Other Assent Rules. This section provides guidance for Internet commerce and an incentive for use of particular types of disclosures of terms and acts as an incentive-creating, safe harbor rule. The section does not foreclose use of other procedures. Failure to comply with this section does not bear on whether a license is enforceable or whether the procedures used adequately establish an opportunity to review. Whether an opportunity to review has occurred is determined under the general standards in Section 113.

3. Disclosure and Downloading. The disclosure rules in this section are modeled the federal Magnuson-Moss Warranty Act. They combine actual disclosure with availability of terms. It is sufficient that standard terms be available on request. Terms might be made available by hyperlink on the particular site or through providing a potential licensee with an address (electronic or otherwise) from which the terms can be obtained. The terms to be made available are the standard terms of a license of the type involved. Supplying the terms can meet the requirements for providing an opportunity to review if the provisions of this section are met.

The terms or a reference to them must be in a prominent place in the site or in close proximity to the computer information or instructions for obtaining it. The intent of the close proximity standard is that the terms or the reference to them would be called to the attention of an ordinary reasonable person.

Given all other conditions being satisfied, this section is met if the licensor does not take affirmative steps to preclude printing or storage of the terms of the agreement. This does not require that the licensor adopt technologies that enable downloading or printing, although many technologies allow this. It does require that there be nothing affirmatively done to preclude use of one of those alternatives. For example, a licensor that uses a technology which would otherwise enable copying the contract terms and modifies it specifically to preclude copying does not qualify under the provisions of this section. However, one method of compliance is sufficient: if the terms include sensitive information that is more susceptible to unauthorized distribution if made available in electronic form, the licensor may preclude electronic copies. As long as it does not also preclude the ability to print a paper copy, this section is still satisfied. If the licensor links the person to another location under the control of a third party, knowing that affirmative steps will be taken at that location to prevent downloading or printing, there is no compliance with this section.

SECTION 115. VARIATION BY AGREEMENT.

(a) [Variation by agreement generally.] Except as otherwise provided in subsection (b), the effect of any provision of this [Act], including an allocation of risk or imposition of a burden, may be varied by agreement of the parties.

(b) [ Rules not variable by agreement.] The following rules are not variable by agreement:

(1) [Obligations of good faith, diligence, reasonableness, and care imposed by this act.] Obligations of good faith, diligence, reasonableness, and care imposed by this [Act] may not be disclaimed by agreement, but the parties by agreement may determine the standards by which the performance of the obligation is to be measured if the standards are not manifestly unreasonable.

(2) [Unconscionability and fundamental public policy.] The limitations on enforceability imposed by unconscionability under Section 111 and fundamental public policy under Section 105(b) may not be varied by agreement.

(3) [Other nonvariable rules.] Limitations on enforceability of, or agreement to, a contract, term, or right expressly stated in the sections listed in the following subparagraphs may not be varied by agreement except to the extent provided in each section:

(A) the limitations on agreed choice of law in Section 109(a);

(B) the limitations on agreed choice of forum in Section 110;

(C) the requirements for manifesting assent and opportunity for review in Section 112;

(D) the limitations on enforceability in Section 201;

(E) the limitations on a mass-market license in Section 209;

(F) the consumer defense arising from an electronic error in Section 213;

(G) the requirements for an enforceable term in Sections 303(b), 307(g), 406(b) and (c), and 804(a);

(H) the requirements of Section 304(b)(2);

(I) the limitations on a financier in Sections 507 through 511;

(J) the restrictions on altering the period of limitations in Section 805(a) and (b); and

(K) the limitations on self-help repossession in Sections 815(b) and 816.

Uniform Law Source: Uniform Commercial Code §§ 1-102(3); 1-203; 1-205(3); 2-303.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Conspicuous"; "Financier"; "Party"; "Return"; "Term". Section 112: "Manifesting assent"; Section 113: "Opportunity to Review."

Comment

1. Scope of Section. Subsection (a) sets out basic principles on the effect and meaning of an agreement. It follows Uniform Commercial Code (1998 Official Text). Subsection (b) delineates rules that cannot be varied by agreement when they are otherwise applicable.

2. Contract Choice. The fundamental policy of this Act is freedom of contract. Subsection (a). See also Uniform Commercial Code § 1-102(3), Official Comment 2 (1998 Official Text). With few exceptions, the parties' agreement controls; the effect of provisions of this Act may be varied by agreement unless the provision is expressly non-variable. This reflects fundamental contract law theory in a free market economy. The absence of the phrase "unless otherwise agreed" or similar language in any provision of this Act does not change this principle.

"Agreement" that varies the effect of a provision of this Act does not require express terms in a record; "agreement" refers to the bargain of the parties in fact and can be found in express terms as well as in course of dealing, course of performance, and usage of trade. To be enforceable, an agreement must satisfy Section 201. Of course, the agreement must be between the parties to which the provision applies. Several provisions of this Act allow a financier to finance a licensee subject to restrictions that protect rights of the licensor. An agreement between the licensee and financier cannot alter the licensor's rights. An agreement between the financier and the licensor cannot alter rights of the licensee.

Subsection (b) lists rules that override express agreement to the contrary. In each case, the policy is that the provision enacts rules that should not be altered except as indicated in those sections. Beyond this list, all other rules can be varied by agreement. Paragraph (b)(1) follows U.C.C. § 1-102(3) (1998 Official Text) and precludes complete waivers of good faith and other stated requirements, but allows parties by agreement to establish standards for performance of the obligation. Paragraph (b)(2) recognizes that unconscionability doctrine and the doctrine in Section 105(b) trump contrary agreement.

Listed exceptions to the rule that agreements govern should be sparingly applied. For example, subparagraph (b)(3)(C) prohibits variation of certain aspects of manifest assent and opportunity to review. That is designed to protect persons who are asked to manifest assent. However, parties can agree to greater protections and, in appropriate cases, to lesser assent standards with respect to future transactions. Section 112(e).

3. Gap-filler Rules. With exceptions stated here, all rules in this Act are "default" or "gap-filler" rules that apply only in the absence of contrary agreement. This is especially important for converging industries and richly diverse commercial practice. Agreed terms that alter default rules do not require specific reference to the default rule and ordinarily do not require use of specific language, presentation or assent, unless expressly so required by this Act. In some situations, this Act expressly imposes a requirement such as that a term be conspicuous or that there be assent to the term. Such requirements exist only if expressly set forth in this Act or in consumer protection statutes. Section 104.

SECTION 116. SUPPLEMENTAL PRINCIPLES; GOOD FAITH; COMMERCIAL PRACTICE.

(a) [Supplemental principles.] Unless displaced by this [Act], principles of law and equity, including the law merchant and the common law of this State relative to capacity to contract, principal and agent, estoppel, duress, coercion, mistake, and other validating or invalidating cause, supplement this [Act]. Among the laws supplementing and not displaced by this [Act] are trade secret laws, unfair competition laws, and the law of fraud, misrepresentation, and unfair and deceptive practices, including pplication of such laws as they may deal with failure to disclose defects.

(b) [Good faith.] Every contract or duty within the scope of this [Act] imposes an obligation of good faith in its performance or enforcement.

(c) [Commercial practice.] Any usage of trade in the vocation or trade in which the parties are engaged or of which the parties are or should be aware and any course of dealing or course of performance between the parties are relevant to determining the existence or meaning of an agreement.

Uniform Law Source: Uniform Commercial Code '' 1-102(3); 1-104; 1-203; 1-205(3); 2-303.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Course of Dealing"; Course of Performance"; "Court"; "Good faith"; "Usage of Trade".

Comment

1. Scope of Section. This section generally follows Uniform Commercial Code (1998 Official Text).

2. Supplemental Rules. Under subsection (a), common law rules to apply to transactions under this Act unless displaced by a provision or policy of this Act. The displacing effect of this Act with respect to common law is found not only in particular provisions of the Act, but also more generally in the policies adopted in the Act. Ordinarily, the appropriate source of supplemental law should be common law, rather than statutes addressing subject matter different from that in this Act. Supplementation does not mean that a common law rule overrides rules or policies in this Act, such as a policy that requires, or does not require, a particular formality or express agreement for a particular contractual result.

The list in subsection (a) is illustrative; no listing could be exhaustive. There are many broadly applicable competition, tax, regulatory, and property laws with which this Act does not deal since it is concerned with contract law. As made clear in subsection (a), trade secret law and unfair competition law are not displaced by this Act, but supplement it pursuant to the first sentence of the subsection. Thus, if trade secret or competition law renders enforcement of a contract or a contract term invalid under that law, this Act does not alter that result. A similar rule is adopted for consumer protection statutes in Section 105.

The last sentence in subsection (a) makes clear several important bodies of statutory or common law that are not displaced by the Act. Thus, trade secret laws, unfair competition laws, and the law of fraud, misrepresentation, and unfair and deceptive practices remain fully in effect and are not displaced. To the extent applicable under that body of law, concepts of fraud and unfair or deceptive practices provide a forum for analysis of the effect of material nondisclosures of known material defects in transactions under this Act. When there is a duty to disclose, the same remedies for undisclosed known defects that apply under other laws, including laws relating to goods and services if applicable, are not disturbed and continue to apply to information products. In addition, express warranties under Section 402 and implied warranties under Sections 403 to 405 of this Act may also apply and afford remedies.

This Act does not deal with computer viruses or alter existing criminal, tort, or other law on that subject. In most States, intentional introduction of a computer virus into a computer system of another person is a criminal act. See Raymond Nimmer, Information Law § 9.04 (1997). Any remedy in contract, however, must be based on an agreement. Absent agreement, no basis for allocating risk under contract principles exists and this Act leaves the issue to other law.

3. Good Faith. Subsection (b) follows Uniform Commercial Code § 1-203 (1998 Official Text), but this Act adopts a broader definition of "good faith." See U.C.C. § 2-103(1)(b) (1998 Official Text); U.C.C. § 3-103(a)(4) (1998 Official Text). Good faith is relevant to the performance of all contracts within the scope of this Act. Good faith is defined in Section 102.

While good faith in performance is an element of all contracts under this Act, the obligation of good faith does not override express contract terms or the right to enforce them. See Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990); Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo. 1995); Badgett v. Security State Bank, 116 Wn.2d 563, 807 P.2d 356 (1991). A lack of good faith is not shown simply by the fact that the party insisted on compliance with contract terms. Neither the idea of honesty nor the idea of fair dealing alters the rule that the obligation of good faith does not override or create new contractual obligations. Ohio Casualty Company v. Bank One, 1997 WL 428515 (N.D. Ill. 1997).

This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, a failure to perform or enforce in good faith a specific duty or obligation under the contract is a breach of that contract. The doctrine of good faith directs a court to interpret contracts within the commercial context in which they are created, performed, and enforced, rather than creating a separate duty of fairness and reasonableness which can be independently breached. See PEB Commentary No.10.

4. Usage of Trade, etc. There are two ideas in subsection (c).

First, terms of an agreement must be defined in light of the commercial context in which the transaction occurs. This principle derives from U.C.C. § 1-205 (1998 Official Text). The terms of an agreement can be as easily found in express contractual language as in the commercial context, such as usage of trade, course of dealing and course of performance.

Second, these commercial factors also provide the background and give meaning to language used. The meaning of the terms of an agreement must be interpreted in light of practical considerations that reflect common commercial understanding. Abstract concepts about what an agreement should mean are not as important as are grounded interpretations of what an agreement does mean in context. Section 302.

SECTION 117. DECISION FOR COURT; LEGAL CONSEQUENCES; REASONABLE TIME; REASON TO KNOW.

(a) [Decision for court.] Questions to be determined by the court include (i) whether a term is conspicuous, (ii) whether a term is enforceable under Section 105(a), (b), or (c), 110, 111, or 209(a), and (iii) whether an attribution procedure is commercially reasonable or effective under Section 108, 212, or 213.

(b) [ Legal consequences.] Whether an agreement has legal consequences is determined by this [Act].

(c) [Reasonable time.] Whenever this [Act] requires any action to be taken within a reasonable time, the following rules apply:

(1) [Nature of circumstances controls.] What is a reasonable time for taking the action depends on the nature, purpose, and circumstances of the action.

(2) [Manifestly unreasonable term precluded.] Any time that is not manifestly unreasonable may be fixed by agreement.

(d) [Reason to know.] A person has reason to know a fact if the person has knowledge of the fact or, from all the facts and circumstances known to the person without investigation, the person should be aware that the fact exists.

Comment

1. Issues as a Matter for the Court. As to unconscionability and conspicuousness, subsection (a) follows Uniform Commercial Code § 1-201(10) and 2-302 (1998 Official Text) and common law on what issues are reserved for decision by a court. In addition, the section lists other issues that are also made questions for the court. The list is not exclusive. There may be further issues that are questions for the court based on the terms of the relevant section or applicable case law or procedural rules.

2. Legal Effect. Subsection (b) derives from Uniform Commercial Code Article 1, moving this rule from the definition of "agreement" to a separate substantive section, with no substantive change in law.

3. Reasonable Time. Subsection (c) derives from Uniform Commercial Code § 1-204 (1998 Official Text). Reasonable time, when used in this Act, is gauged by the commercial context. As in the U.C.C., nothing is stronger evidence of a reasonable time than the fixing of such time by an agreement between the parties. However, a court may disregard a contractual term which fixes a time so unreasonable that it amounts to eliminating all remedy under the contract. The parties are not required to fix the most reasonable time but may fix any time which is not manifestly unreasonable as judged at the time of contracting. The agreement that fixes the time need not be part of the main agreement, but may be separate. By virtue of the definition of "agreement," the circumstances of the transaction, including course of dealing, course of performance, and usage of trade may be material.

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

"Reason to know" must be distinguished from knowledge. Knowledge means an actual conscious belief in or awareness of a fact. Reason to know need not entail a conscious belief in or awareness of the existence of the fact or its probable existence in the future. Of course, a person that has knowledge of a fact also has reason to know of its existence. Reason to know is also to be distinguished from "should know." "Should know" imports a duty to ascertain facts; the term "reason to know" does not entail or assume an obligation to investigate, but is determined solely by the information available to the party. The latter term is used where the person would not be acting adequately in protecting its own interests if it did not act in light of the facts of which it had reason to know.

SECTION 118. TERMS RELATING TO INTEROPERABILITY AND REVERSE ENGINEERING.

(a) [Interoperability defined.] In this section, "interoperability" means the ability of computer programs to exchange information and of such programs mutually to use the information that has been exchanged.

(b) [Contractual term unenforceable.] Notwithstanding the terms of a contract subject to this [Act], a licensee that lawfully obtained the right to use a copy of a computer program may identify, analyze, and use those elements of the program necessary to achieve interoperability of an independently created computer program with other programs, including adapting or modifying the licensee's computer program, if:

(1) the elements have not previously been readily available to the licensee;

(2) the identification, analysis, or use is performed solely for the purpose of enabling such interoperability; and

(3) the identification, analysis, or use is not prohibited by law other than this [Act].

(c) [Applicability of Section 105.] Identification, analysis, or use of elements of a computer program for a purpose other than described in this section is governed by Section 105(b), if applicable.

Uniform Law Source: None.

Definitional Cross-References: Section 102: "Computer program"; "Copy"; "Information"; "Licensee".

Comment

1. Scope of the Section. This section provides that contract terms cannot preclude a licensee from undertaking certain steps to analyze a copy of a computer program for purposes of achieving interoperability, as defined herein. The section was added to the Act in the 2002 Amendments.

2. Reverse Engineering. This section deals with a sensitive issue in technology industries and with a practice typically described as "reverse engineering" here and in the Digital Millennium Copyright Act (DMCA). That practice involves close examination of a product that has been purchased in order to discern technological or other information that is discoverable from that product. Where that technology is not protected by copyright, patent or similar law, and the product is sold on the open market, under trade secret law reverse engineering is recognized as a proper means of acquiring information.

3. Fundamental Public Policy Aspects. A public policy that supports allowing reverse engineering of products distributed on the open market has been recognized in several sources. For example, the Supreme Court has described the ability to reverse engineer products sold on the public market as a fundamental part of intellectual property policy. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 US 141 (1989). Similarly, while the DMCA prohibits circumvention of technological devices that control access to a copyrighted work, it recognizes a policy not to prohibit some reverse engineering where it is needed to obtain interoperability of computer programs. 17 U.S.C. § 1201 (f) (1999) ("a person who has lawfully obtained the right to use a copy of a computer program may circumvent a technological measure . . . for the sole purpose of identifying and analyzing those elements of the program that are necessary to achieve interoperability of an independently created computer program with other programs, and that have not previously been readily available to the person engaging in the circumvention, to the extent any such acts of identification and analysis do not constitute infringement under this title."). The DMCA rule does not exempt conduct that constitutes copyright infringement and this section does not do so either. Case law with respect to copyright infringement, however, holds that certain forms of reverse engineering are fair use at least in cases where the party engaging in the reverse engineering owns the copy that it examines. See Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., 975 F.2d 832 (Fed. Cir. 1992). Compare Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995).

In cases where a contract term is involved and enforceability of that term is the issue, these fair use decisions are only indirectly relevant. Neither DMCA, nor the copyright case law, however, deals with the enforceability of contract terms on reverse engineering. The existence of a contract introduces additional fundamental public policy concerns about the general enforceability of agreements and these policies may support enforcement of the term. See Bowers v. Baystate Technologies, Inc., 302 F.3d 1334 (Fed Cir, 2002). This section states one context in which the balance of interests favors invalidating the contract term. Similarly a European Union Software Directive permits reverse engineering despite a contrary contract clause if the reverse engineering is needed for interoperability, is permitted under other law (e.g., trade secret, copyright, etc.), and involves obtaining interoperability information that is not otherwise readily available.

4. Impact of this Section. This section makes ineffective contract terms that would prevent reverse engineering in certain situations. It is the first time in the United States that a law has extended the underlying policy discussed here to invalidate a contract term. Compare Bowers v. Baystate Technologies, Inc., 302 F.3d 1334 (Fed Cir, 2002). In cases of reverse engineering for purposes other than those covered in this section, subsection (c) makes clear that the general Section 105(b) rule provides the appropriate framework for analysis. See U.S. Copyright Office, Exemption to Prohibition on Circumvention of Copyright Systems for Access Control Technologies, 65 Fed. Reg. 64,556, 64,569 (Oct. 27, 2000) (discussing reverse engineering under DMCA).

5. Protected Conduct. The scope of protection under this section is patterned after the DMCA. 17 U.S.C. § 1201(f), as quoted above. In the circumstances outlined in this section and the DMCA, reverse engineering for purposes of interoperability by a person with a lawful right to use the copy being examined cannot be prohibited by contract. This protection, of course, does not extend to a thief or other person without a lawful right to use the copy.

a. The reverse engineering must be for interoperability as described in subsection (a). Because of the interactive nature of modern digital systems, the capability of competitors creating interoperable products serves an important public policy in the development and evolution of computer and communications systems. The public policy support for reverse engineering is most powerful in this context because of the nature of the environment in which computer information is used.

b. Additionally, under paragraph (b)(1), the reverse engineering must be necessary in the sense that the information is not otherwise readily available. In determining whether information is readily available, a court should examine interpretations of that phrase under the DMCA.

c. This section does not apply if the conduct involved is precluded by other law. Thus, for example, if the licensee's conduct would be a copyright or patent infringement or a misappropriation under trade secret law, then this section does not invalidate the contract term. Cases on the copyright implications of reverse engineering should be consulted where the copy of the computer information contains a work protected under copyright law.

PART 2

SECTION 201. FORMAL REQUIREMENTS.

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

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

(2) the agreement is a license for an agreed duration of one year or less or which may be terminated at will by the party against which the contract is asserted.

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

(c) [Exceptions.] A contract that does not satisfy the requirements of subsection (a) is nevertheless enforceable under that subsection if:

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

(2) the party against which enforcement is sought admits in court, by pleading or by testimony or otherwise under oath, facts sufficient to indicate a contract has been made, but the agreement is not enforceable under this paragraph beyond the number of copies or the subject matter admitted.

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

(e) [Agreement for future transactions.] An agreement that the requirements of this section need not be satisfied as to future transactions is effective if evidenced in a record authenticated by the person against which enforcement is sought.

(f) [Other laws inapplicable.] A transaction within the scope of this [Act] is not subject to a statute of frauds contained in another law of this State.

Uniform Law Source: Uniform Commercial Code: Section 2A-201 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Copy"; "Information"; "License"; "Merchant"; "Notice"; "Party"; "Receive"; "Record"; "Term". Section 117: "Reason to know".

Comment

1. Scope of the Section. This section requires an authenticated record for enforceability of certain agreements. The section blends Uniform Commercial Code concepts with common law approaches. Failure to comply with the requirements of this section does not make the contract void, it merely precludes a party from relying on it as a defense or to bring a cause of action. Under subsection (e), EDI trading partner and similar authenticated records satisfy this section. The rules in this section also apply to agreements brought within this Act by an agreement.

2. Relationship to Federal Law. Federal intellectual property law may require formalities for enforceability of a contract. These federal rules are not affected by this Act. Section 204(a) of the Copyright Act, for example, requires a signed writing for "transfers of copyright ownership," which include assignments and certain other transactions. See Konigsberg International v. Rice 16 F.3d 355, 357 (9^th Cir. 1994); Library Publications, Inc. v. Medical Economics, Co., 548 F. Supp 1231 (E.D. Penn 1982). In general, state law controls regarding non-exclusive licenses. See, e.g., Advent Systems, Ltd. v. Unisys Corp. 925 F.2d 670 (3^rd Cir 1991); World Championship Wrestling, Inc. v. GJS Intern., Inc., 13 F.Supp.2d 725 (N.D. Ill. 1998). Friedman v. Select Information Systems, Inc., 221 U.S.P.Q. 848 (N.D. Cal. 1983). Compare Lulirama, Ltd. v. Axcess Broadcast Services 128 F.3d 872, 879 (5^th Cir. 1997); I.A.E., Inc. v. Shaver, 74 F.3d 768, 775 (7^th Cir. 1996). If federal law applies, the requirements of that law must be met. See, e.g., Radio Television Espanola S.A. v. New World Entertainment, 183 F.3d. 922 (9^th Cir. 1999).

3. Basic Rule. Subject to stated exceptions, under subsection (a) an agreement requiring payment of a contract fee of $5,000 or more is not enforceable by way of action or defense unless there is an authenticated record indicating that a contract was formed and reasonably describing the subject matter or copy. The payments must be required under the agreement assuming that full performance occurs. A royalty provision that might (or might not) ultimately yield millions of dollars of revenue is not within this rule unless the agreement calls for a minimum payment of $5,000 or more. Similarly, an option that might trigger an additional payment is not relevant unless the payment is mandatory.

a. Over One Year Rule. For a license, a record is required only if the threshold dollar amount is met and the license grants rights for an agreed term of more than one year. This reflects the common law statute of frauds, which centers on the duration of the contract, and the fact that for licenses the duration of rights is a significant, independent measure of value. A license for a perpetual duration exceeds one year as would any license that designates a term longer than one year, even if the license permits termination by a party for a reason before that time. However, an option to extend the duration of the license does not bring the contract within the statute unless the option is mandatory. A license that is subject to termination at will does not exceed a one year duration. This rule refers to the term of the license, not to associated agreements. Thus, a license for a perpetual term is within this section even if it is accompanied by a support agreement that can be terminated at will.

b. Record Required. A record, when required, must 1) indicate that a contract was formed, 2) reasonably identify the copy or subject matter involved, and 3) have been authenticated by the party against whom the contract is asserted. No other formalities are required.

This section does not require that the record be retained or that it contain all material terms of the contract or even that it be designated as a contract. All that is required is that the record afford a basis for believing that offered oral evidence rests on a real agreement. A memorandum that fulfills the conditions suffices. But the record must indicate that a contract was formed, not merely that a contract was being negotiated.

Merely because a record satisfies this section does not establish that a contract exists. Nor does it establish the terms of the contract, which must be determined under other sections of this Act. Fulfilling this section merely removes the formal barrier of this section and allows a party to assert the existence of a contract as a basis for a cause of action or a defense. For the contract to actually exist, contract formation rules must be met. For example, while a record need not describe all of the scope of a license to meet this section, there is no contract if there is a material dispute about scope. Section 202. Satisfying the statute of frauds is merely a gateway to being able to have a court consider whether or not there is a contract.

c. Authenticated. Under the general rule, and subject to exceptions provided in this section, the record must be authenticated by the party to be bound. See Section 108 regarding proof of authentication.

d. Subject Matter or Copy. The record must describe the "copy" or "subject matter" covered. "Subject matter" refers to the topic of the agreement; that is, the computer information to which the agreement relates, e.g., the name of a information product, the type of program to be developed, the database to which access is given, or other identifying descriptions. This does not require a description of the detailed scope of a license or of all terms important to the contract. For example, in a license to use a digital photograph, a reference to a "photograph of Greenacre" suffices even if the record does not describe the rights granted. There is no requirement that the record describe the contract fee.

"Copy" refers to the particular copy (e.g., "the copy demonstrated on June 1") or to a copy of identified computer information. The description must identify the copy in a manner that distinguishes it from other copies or from copies of other information. A record is adequate for this purpose if it refers to "one copy of Word Perfection." However, a record that refers to "one copy" without designating what computer information is on the copy is inadequate.

Subsection (b) adapts a rule from Uniform Commercial Code § 2-201 (1998 Official Text). The required description of a copy or subject matter cannot be defeated for purposes of the statute of frauds by showing that it was incorrect. However, the contract is not enforceable beyond the number of copies or subject matter shown in the authenticated record. Both terms are limitations on enforcement. Thus, a record which refers to "one copy of Word Essence" cannot be enforced beyond one copy of that program. A record that refers to "access to Whisedata" cannot be enforced beyond access to that database and does not support an enforceable right to any copies of it. A term that states "one copy," but does not say of what, fails this section entirely. A term that states "Wordperfection" may allow proof of a contract for enforceable rights in that work, but does not allow enforcement of any contract rights in or to any copies of the work.

4. Exceptions to the Basic Rule. There are four exceptions to the basic rule based on transactional circumstances that render the protective policies of this section moot.

a. Partial Performance. Under subsection (c)(1), the requirements of subsection (a) are not imposed if there was a tender of performance by one party and acceptance or access by the other. Here, the acts by both parties adequately establish that a contract may exist; the authenticated record of subsection (a) is unnecessary. Partial performance satisfies the statute of frauds in full, rather than solely with respect to the performance itself. Parol evidence rules and ordinary contract interpretation principles protect against unfounded claims of extensive contract obligations based on a tender and acceptance of limited performance.

The exception requires both tender and acceptance or access. Mere possession of a copy does not satisfy this exception, which depends on there being an authorized source that delivered the copy. Similarly, the performance tendered and accepted must be sufficient to show that a contract exists and cannot consist of minor acts of ambiguous nature. Thus, mere access to information at an Internet web site does not satisfy the statute of frauds when there is no indication that a contract exists or that the access resulted in assent to contract terms. Section 112.

Performance under this subsection merely allows the party to attempt to prove the existence of a contract. It does not prove that a contract exists or what terms govern. These must be established under other provisions of this Act. For example, in an alleged contract to develop and deliver three modules of a new computer program, tender and acceptance of one module satisfies the formalities required by the section, but whether there was actually a contract covering three modules must be proven by the party claiming that it exists.

b. Judicial Admissions. An authenticated record is not needed if the party charged with the contract obligations admits in proceedings that a contract exists. The admission confirms the existence of the contract to the extent of the subject matter admitted. Consistent with U.C.C. Article 2 (1998 Official Text), however, the admission satisfies the section only to the extent of the subject matter or copies admitted.

c. Confirming Memoranda. Subsection (d) generally follows U.C.C. § 2-201 (1998 Official Text). Between merchants, failure to respond to a record that confirms may satisfy this section with respect to both parties. The ten day rule in U.C.C. Article 2 is replaced in this Act by a "reasonable time" to better accommodate varying commercial practices. The rule in subsection (d) validates practice in many industries where the volume or nature of the transactions make it impossible to prepare and receive assent to records as part of making the initial agreement. The confirming memorandum places the other party on notice that a contract has been formed. It must object to the existence of a contract if one, in fact, does not exist or otherwise lose protection of this section. Failure to object does not establish that a contract exists or what are the terms, but merely removes the formal barrier in subsection (a). The burden of persuading a trier of fact that a contract was actually made is not affected by this rule.

5. Other Agreements. Subsection (e) confirms the enforceability of trading partner or similar agreements that alter the requirements of this section with respect to covered transactions. The parties can agree in an authenticated record to conduct business without additional authenticated records. That agreement satisfies the policy of requiring minimal indication that a contract was formed. The purpose of this section is to prevent fraud, not to inhibit development of reasonable commercial practices between parties.

6. Other Laws. Subsection (f) clarifies that the formalities required by this section supplant formalities required under other state laws for transactions within this Act. This rule applies only with respect to state law. Federal law may require more stringent formalities. For example, the Copyright Act requires that an exclusive copyright license be in a writing and makes non-exclusive licenses that are not in a writing subject to subsequent transfers of the copyright.

SECTION 202. FORMATION IN GENERAL.

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

(b) [ Sufficiency of agreement.] If the parties so intend, an agreement sufficient to constitute a contract may be found even if the time of its making is undetermined, one or more terms are left open or to be agreed on, the records of the parties do not otherwise establish a contract, or one party reserves the right to modify terms.

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

(d) [ Material disagreement precludes formation.] In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including a term concerning scope. For purposes of this subsection, the material disagreement must exist at the time of attempted contracting and may not involve a later dispute about the meaning of agreed terms.

(e) [Contract conditional on later agreement.] If a term is to be adopted by later agreement and the parties intend not to be bound unless the term is so adopted, a contract is not formed if the parties do not agree to the term. In that case, each party shall deliver to the other party, or with the consent of the other party destroy, all copies of information, access materials, and other materials received or made, and each party is entitled to a return with respect to any contract fee paid for which performance has not been received, has not been accepted, or has been redelivered without any benefit being retained. The parties remain bound by any restriction in a contractual use term with respect to information or copies received or made from copies received pursuant to the agreement, but the contractual use term does not apply to information or copies properly received or obtained from another source.

Uniform Law Source: Uniform Commercial Code: Sections 2-204; 2-305(4); 2A-204 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Contract fee"; "Contractual use term"; "Deliver"; "Electronic agent"; "Information"; "Licensee"; "Licensor"; "Party"; "Record"; "Receive"; "Scope"; "Term".

Comment

1. Scope of Section. This Act separates the issue of whether a contract is formed from issues of what the terms of the contract are or whether those terms are enforceable. This section deals with contract formation. It is subject to the specific rules on offer and acceptance in subsequent sections. Sections 208, 209, and 210 deal with establishing the terms of a contact by an agreed record or by conduct. Often, of course, the same acts that form a contract define its terms.

2. Manner of Formation. Subsection (a) follows Uniform Commercial Code § 2-204 (1998 Official Text), the Restatement (Second) of Contracts ' 19, and common law in most States. A contract can be formed in any manner sufficient to show agreement: orally, in writing, by conduct or inaction or otherwise. Of course, no contract is formed without an intent to contract. This section does not impose a contractual relationship where none was intended. In determining whether or not conduct or words establish a contract, courts must look to the entire circumstances, including applicable usage of trade or course of dealing.

Subsection (a) recognizes that an agreement can be formed by operations of electronic agents. This is important for electronic commerce and gives force to choices by a party to use an electronic agent for formation of a contract. The agent's operations bind the person who deployed the agent for that purpose.

3. Time of Formation. Subsection (b) follows U.C.C. § 2-204 (1998 Official Text). If the intent to do so exists, a contract can be formed even though the exact time of its formation is not known or there are terms left open or deferred for later delineation by one party. This rule exists in both the U.C.C. and common law. It focuses on the commercial context and on whether there was an intent to contract, rather than on whether the form or format of an exchange complies with abstract concepts of when a contract should be recognized in law.

4. Open Terms and Layered or Rolling Transactions. Under subsection (c), if the parties intend to be bound, the agreement is binding despite missing or otherwise open terms, so long as any reasonable basis exists for granting a remedy in the event of breach. This rule does not apply if the parties do not intend to be bound unless or until the remaining terms are agreed or reduced to writing. See, e.g., Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2d Cir. 1998) (applying New York law). There is a difference between preliminary negotiations and actions or statements made with intent to be bound, even though terms are left open. If the parties did not intend to be bound unless terms were later agreed to and there was no later agreement, subsection (e) gives guidance for unwinding the relationship. In law, when a contract is formed and how terms are added over time turns on the intent of the parties. In determining that intent, the more terms left open, the less likely it is that the parties intended to be bound at the outset.

This subsection lays a foundation for the layered contracting that typifies many areas of commerce and is recognized in Uniform Commercial Code § 2-204 (1998 Official Text), as well as in the common law and practice of most States. This foundation is further developed in Sections 208, 209, 304, and 305. Many contract terms are intended, expressly or by usage of trade or the like, to be defined over time, rather than on the occurrence of one specific event. Contract formation is often a process, rather than a single event. A rule that a contract must arise at a single point in time and that this single event defines all the terms of the contract is inconsistent with commercial practice. Contracts are often formed over time; terms are often developed during performance, rather than before performance occurs. Often, parties expect to adopt records later and that expectation itself is the agreement. Rather than modifying an existing agreement, these terms are part of the agreement itself. Treating later terms as proposed modifications is appropriate only if the deal has previously been, in the commercial understanding of both parties, fully closed with no reason to know that new terms would be provided.

During the time in which terms in a layered contract are developed or to be proposed, it is not appropriate to the apply default rules of this Act. The default rules apply only if the agreement of the parties does not deal with the subject matter of the rule. In layered contracting, the agreement is that there are no terms on the undecided issues until they are made express by the parties. Applying a default rule would be applying the rule despite contrary agreement, rather than when no such agreement exists.

5. Disagreement on Material Terms: Scope. The existence of a contract requires a determination of intent to contract, objectively measured. In some cases, the circumstances clearly indicate that no intent to contract exists. Subsection (d) sets out one such context. A material disagreement about an important (material) term indicates that there is no intent to enter a contract. The "scope" of a license is one such term. It goes to the fundamentals of the transaction, i.e., what the licensor intends to transfer and what the licensee expects to receive. Disagreements about this fundamental issue indicate fundamental failure to agree on a contract. The reference in subsection (d) to disagreement relates to this type of failure to agree and does not refer to a later dispute about the meaning of an agreed term, a point made clear in the second sentence of subsection (d).

6. Failure to Agree. Subsection (e) follows Uniform Commercial Code § 2-305(4) (1998 Official Text). While many cases involve layered contracting, the parties may intend not to be bound unless they agree to terms later. See Section 208, Official Comment 4. Subsection (e) deals with cases where that later agreement does not occur. The basic rule is that parties are returned to the status that would have existed in the absence of initial agreement. There is an obligation to return copies or information received during the preliminary period. Any contractual use terms in the proposed final deal do not apply because no contract was formed. If, however, the parties agreed to restrictions on the information or copies as part of the process of negotiation or discussion, the restrictions continue as to that information or those copies. The restrictions must be agreed to independent of agreement on the entire proposed contract. This often occurs with terms on nondisclosure of confidential material exchanged in preliminary discussions.

The continued effect of such terms assumes an agreement in fact. Thus, a negotiation involving two mutually conditional points only one of which is "agreed to" may not create a contractual use term if the two are mutually condition and no agreement is reached on the second. In any event, the terms do not extend to authorized copies obtained from other sources. For example, a preliminary agreement restricting use of data compression software is binding as to the copies delivered, but it does not preclude the licensee from making an agreement with another authorized source for a copy of the same software. Of course, in addition to contract terms, intellectual property rights may limit a party's use of information.

SECTION 203. OFFER AND ACCEPTANCE IN GENERAL. Unless otherwise unambiguously indicated by the language or the circumstances, the following rules apply:

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

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

(3) [Acceptance by beginning performance.] If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance or performance within a reasonable time may treat the offer as having lapsed before acceptance.

(4) [Electronic acceptance.] If an offer in an electronic message evokes an electronic message accepting the offer, a contract is formed:

(A) when an electronic acceptance is received; or

(B) if the response consists of beginning performance, full performance, or giving access to information, when the performance is received or the access is enabled and necessary access materials are received.

Uniform Law Source: Restatement (Second) of Contracts § 19; Uniform Commercial Code §§ 2A-206; 2-206 (1998 Official Text).

Definitional Cross References: Section 102: "Access Materials"; "Copy"; "Contract"; "Delivery"; "Electronic"; "Electronic message"; "Licensee"; "Licensor"; "Information"; "Notifies"; "Party"; "Receive"; "Term".

Comment

1. Scope of Section. This section states general rules on offer and acceptance. Sections 204 and 205 concern acceptances that vary the offer and conditional offers or acceptances; when applicable, those sections control over this section to the extent of a conflict.

2. Reasonable Methods of Acceptance. A party has a right to control the terms under which its offer can be accepted, if it does so expressly. In many cases, this occurs by insistence on agreement to all terms or on following a stated method for acceptance. If an offeror does not limit the method of acceptance, any reasonable manner of acceptance suffices. This rule reflects ordinary practice and follows Restatement (Second) of Contracts § 19 and Uniform Commercial Code § 2-206 (1998 Official Text).

3. Shipment or Promise to Ship. Paragraph (2) follows Uniform Commercial Code § 2-206(1)(b) (1998 Official Text). Either a shipment or a prompt promise to ship the copy is a proper means of acceptance of an offer looking to current shipment of a copy, unless the offer otherwise states. The second sentence recognizes that, in some cases, it is useful commercially to accommodate a request for a copy with a shipment that may not fully conform. In such cases, there is no acceptance of the offer if the shipping party notifies the licensee that the shipment is offered only as an accommodation. Paragraph (2) has more limited application in this Act than Article 2. It applies only to contracts that call solely for a return performance by shipment of a copy. It does not apply to a license of information since the terms of the license are not set by shipment itself.

4. Beginning of Performance. The beginning of performance by an offeree can be an acceptance if it unambiguously indicates an intent to be bound. Paragraph (3) follows Uniform Commercial Code § 2-206 (1998 Official Text) in limiting that effect to prevent abuse. Beginning performance as acceptance, even if a reasonable means of acceptance, requires notice to the offeror that there has been acceptance. If notice is not given in a reasonable time, the offeror can treat its offer as having lapsed before acceptance.

5. Electronic Responses. Paragraph (4) adopts a time of receipt rule for an electronic acceptance or an electronic performance. The performance may entail making access available to the other party. In this case, acceptance by performance occurs when the access is enabled or access materials are received.

SECTION 204. ACCEPTANCE WITH VARYING TERMS.

(a) [When acceptance materially alters offer.] An acceptance materially alters an offer if it contains a term that materially conflicts with or varies a term of the offer or that adds a material term not contained in the offer.

(b) [When contract formed by varying acceptance.] Except as otherwise provided in Section 205, a definite and seasonable expression of acceptance operates as an acceptance, even if the acceptance contains terms that vary from the terms of the offer, unless the acceptance materially alters the offer.

(c) [Effect of acceptance materially altering offer.] If an acceptance materially alters the offer, the following rules apply:

(1) [When contract formed.] A contract is not formed unless:

(A) a party agrees, such as by manifesting assent, to the other party's offer or acceptance; or

(B) all the other circumstances, including the conduct of the parties, establish a contract.

(2) [Contract formed by conduct.] If a contract is formed by the conduct of both parties, the terms of the contract are determined under Section 210.

(d) [Effect of acceptance not materially altering offer.] If an acceptance varies from but does not materially alter the offer, a contract is formed based on the terms of the offer. In addition, the following rules apply:

(1) [Conflicting terms.] Terms in the acceptance which conflict with terms in the offer are not part of the contract.

(2) [Additional terms.] An additional nonmaterial term in the acceptance is a proposal for an additional term. Between merchants, the proposed additional term becomes part of the contract unless the offeror gives notice of objection before, or within a reasonable time after, it receives the proposed terms.

Uniform Law Source: Uniform Commercial Code: Section 2-207.

Definitional Cross References: Section 102: "Contract"; "Delivery"; "Merchant"; "Give notice"; "Party"; "Receive"; "Seasonable"; "Term". Section 112: "Manifest assent". Section 117: "Reasonable time."

Comment

1. Scope of Section. This section deals with contract formation when the acceptance contains terms that vary the offer, but neither the offer nor the acceptance is expressly conditional on acceptance of all of its own terms. Conditional offers and acceptances are covered in Section 205.

2. Basic Rule. Subsection (a) follows Uniform Commercial Code § 2-207(1) (1998 Official Text). If neither the offer nor the acceptance is expressly conditioned on acceptance of its own terms, a definite expression of acceptance may form a contract even if it contains terms that do not fully match the offer. The common law "mirror image" rule was rejected in Article 2 and is not now followed as common law in many states.

If a purported acceptance varies from the offer, however, it forms a contract only if the accepting party indicated an intent to form the contract and enough similarity exists between the acceptance and the offer to conclude that acceptance occurred. An acceptance with varying terms must be a definite expression of acceptance. Anything less is a counter-offer or, perhaps, mere negotiation. Also, a response is not an acceptance if it materially alters the offer. One does not accept by proposing materially different terms. The conditions for treating a response that contains varying terms as an acceptance are seldom met except in cases of standard form purchase orders or invoices. In most other cases, a response with varying terms is a counter-offer, not an acceptance.

3. Material Alteration. A material alteration of an offer by a purported acceptance precludes contract formation based on the purported acceptance. If a contract is formed in such cases, it must be based on other factors, such as conduct that establishes a contract, another acceptance conforming to the terms of an offer, or other circumstances that clearly show that one party accepted the terms of the other.

What is a material alteration depends on the commercial context. A nonmaterial alteration refers to an acceptance that adds further minor suggestions or proposals. A material change is one that would result in surprise, hardship or fundamental change if incorporated without express agreement by the other party, or one that would significantly alter the bargain proposed by the offeror. The issue must be judged by what degree of acceptable variation parties might reasonably expect in light of applicable usage of trade and course of dealing. Any change in an offer that is expressly conditional on acceptance of all of its terms is a material change.

4. Immaterial Alteration. If a definite acceptance does not fully conform to the terms of the offer but does not materially vary it, the acceptance creates a contract. In deciding what are the terms of the contract, Section 210 does not apply, because the contract is formed by offer and acceptance, not conduct. Under subsection (d), the terms are based on the terms of the offer and other terms as indicated. Conflicting terms in the acceptance are excluded. A conflicting term is one that covers the same subject matter of another term, but in a different way. Subsection (d) allows for inclusion of non-material additional terms in a transaction between merchants unless the offeror timely objects to those terms. An additional term is one that covers a subject not addressed in the offer.

SECTION 205. CONDITIONAL OFFER OR ACCEPTANCE.

(a) [When offer or acceptance conditional.] An offer or acceptance is conditional if it is conditioned on agreement by the other party to all the terms of the offer or acceptance.

(b) [Effect of conditional offer or acceptance.] Except as otherwise provided in subsection (c), a conditional offer or acceptance precludes formation of a contract unless the other party agrees to its terms, such as by manifesting assent.

(c) [Conditional offer or acceptance in standard form.] If the offer and acceptance are in standard forms and at least one form is conditional, the following rules apply:

(1) [Acts consistent with conditions.] Conditional language in a standard term precludes formation of a contract based on the offer or acceptance if the actions of the party proposing the form are consistent with the conditional language, such as by refusing to perform, refusing to permit performance, or refusing to accept the benefits of the agreement, until its proposed terms are accepted.

(2) [ Agreement to conditions.] A party that agrees, such as by manifesting assent, to a conditional offer that is effective under paragraph (1) adopts the terms of the offer under Section 208 or 209, except for a term that conflicts with an expressly agreed term regarding price or quantity.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Party"; "Standard form"; "Term". Section 112: "Manifestation of assent".

Comment

1. Scope of Section. This section deals with conditional offers or acceptances. In a conflict between this section and general rules on formation, this section controls as to these issues.

2. Basic Rule. Subsection (a) states the basic principle that a person can insist on preconditions for acceptance of its offer without being forced into a different relationship because the conditions are ignored. The most common conditional offer or acceptance limits the other party to acceptance of all of its terms. No principled view of contract law precludes a party from insisting on such conditions and precluding a contract on other terms. The language of condition need not be in a record or stated in any specific form of language.

3. Standard Forms. The rule does not change merely because the conditions are in a standard form. Conditional forms state the terms under which a party is willing to enter a transaction. The mere fact that the conditions are not tailored to each individual deal does not lessen their effect. Standardization is an ordinary and efficient means of doing business.

4. Battle of Standard Forms. Subsection (b) deals with a situation where both parties use standard forms for offer and acceptance and one or both are conditioned on acceptance of all terms in the form. In that case, if the forms disagree, there is no contract based on the standard forms. However, the parties often act as if a contract exists and that behavior may form a contract.

Under subsection (b), the conditional language in a standard form is enforced only if a party proposing the form acts in a manner consistent with the language in its form. If the party whose form is conditional on acceptance of its terms ignores that condition by its own conduct, the condition is not enforced and a contract is created under the section on varying terms. If, on the other hand, the party's behavior is consistent with its conditional terms, such as by refusing to perform fully, refusing to permit performance, or refusing to accept the benefits of the contract, until the terms are accepted, there is no contract by the exchange of forms unless one party accepted the other party's terms. If the other party accepts the terms, under paragraph (b)(2) the contract is formed based on those terms, except to the extent they might conflict with expressly agreed terms on price or quantity.

Illustration 1. Licensee sends a standard purchase order form that states that its order is conditional on the Licensor's assent to the terms of the form. Licensor ships with an invoice conditioning the contract on assent to its terms, but takes no steps to enforce that condition. Purchaser accepts the shipment. Neither party acted consistent with the language of condition. A contract exists but neither condition is enforced. Section 204, 208, or 210 applies.

Illustration 2. In Illustration 1, in response to the purchase order, Licensor refuses to ship unless Licensee agrees to the Licensor's terms. Until that occurs, there is no contract. Licensor's terms govern when agreed to by the Licensee. The same result occurs if Licensor ships, but includes in the information a code that prevents use unless the Licensee assents to the Licensor's terms.

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

SECTION 206. OFFER AND ACCEPTANCE: ELECTRONIC AGENTS.

(a) [Formation by interaction of electronic agents.] A contract may be formed by the interaction of electronic agents. If the interaction results in the electronic agents' engaging in operations that under the circumstances indicate acceptance of an offer, a contract is formed, but a court may grant appropriate relief if the operations resulted from fraud, electronic mistake, or the like.

(b) [ Formation by interaction of individual and electronic agent.] A contract may be formed by the interaction of an electronic agent and an individual acting on the individual's own behalf or for another person. A contract is formed if the individual takes an action or makes a statement that the individual can refuse to take or say and that the individual has reason to know will:

(1) cause the electronic agent to perform, provide benefits, or allow the use or access that is the subject of the contract, or send instructions to do so; or

(2) indicate acceptance, regardless of other expressions or actions by the individual to which the individual has reason to know the electronic agent cannot react.

(c) [Terms of the contract.] The terms of a contract formed under subsection (b) are determined under Section 208 or 209 but do not include a term provided by the individual if the individual had reason to know that the electronic agent could not react to the term.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Electronic agent"; "Information"; "Party"; "Person"; "Term". Section 117: "Reason to know".

Comment

1. Scope of the Section. This section deals with contracts formed by interaction between electronic agents, or between an individual (acting on the individual's own behalf or for another person such as a company) and an electronic agent.

2. Interaction of Electronic Agents. Interaction of electronic agents creates a contract if the parties use the agents for that purpose and the operations of the electronic agents indicate that a contract exists. Conduct, even automated, can create a contract. Whether a contract is formed focuses on the operations of the agents. The issue is whether those operations indicate that a contract is formed, such as by sending and receiving the benefits of the contract, initiating orders, or indicating in records that a contract exists. The terms of the contract are determined under Section 208 and 209 as applicable. However, a contract is formed only by operations taken with respect to a legally significant event. An electronic agent may accept an offer, but acceptance of a message that is not an offer (such as an advertisement) does not form a contract.

3. Electronic Mistake and Fraud. Under subsection (a), restrictions analogous to common law concepts of fraud and mistake are made applicable to this automated context to prevent abuse or clearly unexpected results. Of course, parties may allocate risk of mistake or fraud in an agreement.

Assent does not occur if the operations are induced by mistake, fraud or the like, such as where a party or its electronic agent manipulates the programming or response of the other electronic agent in a manner akin to fraud. Such acts vitiate the assent that would occur through normal operations of the agent. Similarly, the inference is vitiated if, because of aberrant programming or through an unexpected interaction of the two agents, operations indicating existence of a contract occur in circumstances that are not within the reasonable contemplation of the parties. Such circumstances are analogous to mutual mistake. Courts applying these concepts should refer to mistake or fraud doctrine, even though an electronic agent cannot actually be said to have been misled or mistaken.

4. Interaction of Human and Electronic Agent. Contracts may be formed by interaction of an individual (human being) and an electronic agent. Subsection (b) does not define all cases where this can occur or the results of all interactions, such as where the individual is not aware that he is dealing with an electronic agent. The section describes one setting with two elements: 1) an electronic agent programmed to make contracts, and 2) an individual, having the ability not to do so, engaging in conduct or making a statement with reason to know that this will cause the electronic agent to provide the benefits of the contract or otherwise indicate acceptance. If the individual is dealing with an electronic agent, it may be that not all statements or actions by the individual can be reacted to by the electronic agent. A contract is formed if the human makes statements or engages in conduct that indicate assent. Statements purporting to alter or vitiate agreement to which the electronic agent cannot react are ineffective.

Illustration. Officer dials the telephone information system using the company credit card. A computerized voice states: "If you would like us to dial your number, press "1"; there will be an additional charge of $1.00. If you would like to dial yourself, press "2." Officer states into the phone that the company will not pay the $1.00 additional charge, but will pay .50. Having stated these conditions, Officer strikes "1." The computer dials the number. User's "counter offer" is ineffective, because Officer has reason to know that the program cannot react to the counter offer. The charge to dial the number includes the additional $1.00.

SECTION 207. FORMATION: RELEASES OF INFORMATIONAL RIGHTS.

(a) [Consideration not required.] A release is effective without consideration if it is:

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

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

(b) [ Duration.] A release continues for the duration of the informational rights released if the release does not specify its duration and does not require affirmative performance after the grant of the release by:

(1) the party granting the release; or

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

Definitional Cross References: Section 102: "Agreement"; "Informational rights"; "License"; "Party"; "Record"; "Release". Section 112: "Manifesting assent."

Comment

1. Scope of Section. This section deals with the enforceability and duration of a release. A release is a promise that the releasing party will not object to, or exercise any remedies to limit, the use of computer information or informational rights, but does not contain significant, affirmative obligations by the releasing party.

2. Basic Rule. A release is enforceable without consideration if it is in a record to which the releasing party agrees, by manifesting assent or otherwise. This includes all means of assent and all forms of creating a record, such as by filmed assent. The rule clarifies the enforceability of releases in a record, but it does not alter other law making releases enforceable, whether or not supported by consideration, such as the law of estoppel or waiver.

Illustration: In Internet "chat room" and "list service" systems, participation often requires permission by the participant to allow use of comments or materials submitted. If the relationship granting that permission is supported by assent and consideration (e.g., one party grants the right to use the service in return for the release), the release is enforceable under ordinary contract law principles of offer and acceptance. This section makes clear that the release is enforceable without consideration.

3. Duration. The duration of a release is determined by its terms. If there is no stated duration, the common law regarding duration of contracts applies. However, subsection (b) states a different rule for releases where there is no significant involvement by a party to support the other's use of the information or rights. In these cases, the release is for the duration of the released rights. Of course, a release is effective only according to its own substantive terms; a release for use of an image at an Internet site does not release rights for other uses of that image.

[SUBPART B. TERMS OF RECORDS]

SECTION 208. ADOPTING TERMS OF RECORDS. Except as otherwise provided in Section 209, the following rules apply:

(1) [Adoption of terms.] A party adopts the terms of a record, including a standard form, as the terms of the contract if the party agrees to the record, such as by manifesting assent.

(2) [Later terms.] The terms of a record may be adopted after beginning performance or use if the parties had reason to know that their agreement would be represented in whole or part by a later record to be agreed on and there would not be an opportunity to review the record or a copy of it before performance or use begins. If the parties fail to agree to the later terms and did not intend to form a contract unless they so agreed, Section 202(e) applies.

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

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Copy"; "Party"; "Record"; "Standard form"; "Term". Section 112: "Manifest assent"; Section 113: "Opportunity to review." Section 117: "Reason to know".

Comment

1. Scope of Section. This Act deals separately with when a contract is formed and what are its terms, although the same conduct often does both. This section states when a party adopts a record as the contract. Section 209 limits terms in mass-market licenses. Section 210 deals with when records do not create terms, but a contract exists by conduct. Trade use, course of dealing, and course of performance are also relevant as are the supplementary rules of this Act for topics on which the other sources of terms do not control.

2. Adopting Terms. A party that assents to a record adopts the record as the terms of the contract whether or not the record is a standard form. There is no difference between a customized record or terms of a standard form. Standard forms are common and provide efficiencies for both parties; they are used by both licensees and licensors. Treating them as of lesser effect than other records would place commercial contract law in conflict with commercial practice.

A party is bound by the terms of a record only if it agrees to it, by manifesting assent or otherwise. Assent can be by authenticating the record or by other conduct indicating assent. However, a party cannot assent unless it had an opportunity to review the record before reacting. Section 113. See Specht v. Netscape Communications Corp., - F.3d -, 2002 WL 31166784 n. 13 (Fed. Cir. 2002).

3. Later Terms: Layered Contracting. Subsection (b) reflects the reality of layered contracting. While some contracts are formed and their terms defined at a single point in time, many transactions involve a rolling or layered process. The commercial expectation is that terms will follow or be developed after performance begins. This Act rejects cases that narrowly treat contracting as a single event despite ordinary practice. It adopts a rule in cases that recognize that contracts are often formed over time. See, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); M.A. Mortenson Co., Inc. v. Timberline Software Corp., 970 P.2d 803 (Wash. 2000).

a. Reason to Know. Contract terms proposed for later agreement to complete the initial contract are part of the initial contracting process if the parties had reason to know that later terms would be proposed. "Reason to know" means that, realistically considered, later presentation of terms should not be a surprise. It does not require specific notice or specific language, although such factors may be important because notice suffices. "Reason to know" can also be inferred from the circumstances, including ordinary business practices or marketing approaches of which a party is or should be aware and from which a reasonable person would infer that terms will follow. The time over which the record can be proposed must be reasonable as shaped by the expectations of the parties, the context and their agreement. Compare Section 209. At some point, the deal is closed, but when this is true requires analysis focused on the context and circumstances. If the parties considered terms of the deal to be closed, subsequently proposed terms are proposed modifications.

b. Specification of Terms. Subsection (b) deals with cases that differ from those under Section 305, which governs agreements that give one party a right to specify terms. In cases under Section 305, the party receiving terms is not asked to assent; the agreement gives the other party the right to specify terms. Since no assent is required, the terms must be proposed in good faith and in accord with reasonable commercial standards. Those conditions are not appropriate when the party receiving terms can simply refuse them.

4. Later Terms: Roadmap. The following gives guidance on how to handle cases with later terms. Unless the parties' agreement is that one party has the right to specify terms without the other party being required to assent to the terms (see, e.g., Sections 304 and 305), as a general rule the later terms do not become part of the contract unless the party receiving them agrees to the terms such as by manifesting assent after having an opportunity to review often including a right to return, as described in sections 102(a)(57), 112, 113, 208, and 209. This Act applies in the following way:

• •If the parties did not have reason to know that terms would be proposed later for assent and a contract was formed before the terms were available for review and assent, the later terms are treated as proposed modifications that may be accepted or rejected under rules applicable to contract modifications including Section 303.
• •If the parties agree that one party could specify later terms, but no further assent is required, Sections 304 and 305 apply.
• •In a mass-market license, if the parties had reason to know that terms would be proposed later for assent and the later terms are agreed on, there is a contract including those terms; but if the later terms are rejected, there is no contract under Section 209(b) and the parties' obligations are determined by this Act, including Sections 208, 209 and 202(e) as applicable.

• •In all other cases:

• •If the parties had reason to know that terms would be proposed later for assent and did not intend to have a contract unless the later terms were agreed to by manifesting assent or otherwise and the later terms are agreed on, there is a contract including those terms; but if the later terms are rejected, there is no contract and the parties' obligations are determined by this Act, including Sections 208, 209 and 202(e) as applicable.

• •If the parties had reason to know that terms would be proposed later for assent and intended to have a contract even if the later terms were rejected and the terms are agreed on they become part of the contract; but if the terms are rejected, the rejected terms are left open pursuant to this Act, including Section 306, unless covered by other agreement of the parties.

5. Mass-Market Contracts. Subsection (b) applies in the mass market. However, Section 209 places limits on when proposal of the terms must occur and precludes altering terms expressly agreed by the parties.

6. Right to a Return. In some cases, if assent is sought after the person has paid or delivered or become obligated to pay or deliver, the manifestation of assent is not effective unless the person has a right to a return if it refuses the proposed terms. Section 112; 113. This rule applies in mass market transactions and to other cases where the licensor's performance is mere delivery of a copy, but does not apply in more complex commercial contexts where general principles of equity govern because of the complexity. Section 202(e) provides guidance where the parties did not intend to have a contract in the absence of agreeing to terms.

7. Adoption of Terms. Assent to a record adopts all terms of the record; there is no requirement that the party read, understand or separately assent to each term. Of course, enforceability of terms is subject to doctrines set out in this Act regarding unconscionability, public policy, good faith, and the like. But this Act rejects Restatement (Second) of Contracts § 211(3). Absent unconscionability, fraud or similar conduct, parties are bound by the terms to which they assent after having had an opportunity to review.

SECTION 209. MASS-MARKET LICENSE.

(a) [Limitation on terms.] Adoption of the terms of a mass-market license under Section 208 is effective only if the party agrees to the license, such as by manifesting assent, before or during the party's initial performance or use of or access to the information. A term is not part of the license if:

(1) the term is unconscionable or is unenforceable under Section 105(a) or (b);

(2) subject to Section 301, the term conflicts with a term to which the parties to the license have expressly agreed;

(3) under Section 113, the licensee does not have an opportunity to review the term before agreeing to it; or

(4) the term is not available to the licensee after assent to the license in one or more of the following forms:

(A) an immediately available nonelectronic record that the licensee may keep;

(B) an immediately available electronic record that can be printed or stored by the licensee for archival and review purposes; or

(C) in a copy available at no additional cost on a seasonable request in a record by a licensee that was unable to print or store the license for archival and review purposes.

(b) [Right of return and reimbursement.] If a mass-market license or a copy of the license is not available in a manner permitting an opportunity to review by the licensee before the licensee becomes obligated to pay and the licensee does not agree, such as by manifesting assent, to the license after having an opportunity to review, the licensee is entitled to a return under Section 113 and, in addition, to:

(1) reimbursement of any reasonable expenses incurred in complying with the licensor's instructions for returning or destroying the computer information or, in the absence of instructions, expenses incurred for return postage or similar reasonable expense in returning the computer information; and

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

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

(B) the installation alters the system or information in it but does not restore the system or information after removal of the installed information because the licensee rejected the license.

(c) [Licensor's opportunity to review.] In a mass-market transaction, if the licensor does not have an opportunity to review a record containing proposed terms from the licensee before the licensor delivers or becomes obligated to deliver the information, and if the licensor does not agree, such as by manifesting assent, to those terms after having that opportunity, the licensor is entitled to a return.

(d) [Notice of refund.] In a case governed by subsection (b), notice must be given in the license or otherwise that a refund may be obtained from the person to which the payment was made or other person designated in the notice if the licensee refuses the terms.

Definitional Cross References: Section 102: "Contract"; "Information"; "Information processing system"; "Informational Rights"; "License"; "Licensor"; "Mass-market license"; "Mass-market transaction"; "Notice"; "Party" "Return"; "Term". Section 112: "Manifest assent"; Section 113: "Opportunity to review".

Comment

1. Scope of Section. Mass-market licenses are typically standard forms where the licensee either takes or leaves the license. Thus, significant protections are provided in this section. This section must be read in connection with Sections 208, 112 and 113. In addition, trade use, course of dealing, and course of performance are relevant, as are the supplementary terms of this Act on issues not resolved by express terms or practical construction. Sections 116(c), 302. Many mass-market licenses are available for review and agreed to at the outset of a transaction; but some licenses are presented later. This section deals with both and relies also on the rules in Section 208. Many mass-market transactions involve three parties and two contracts. That circumstance is addressed here and in Section 613.

2. General Rules for Enforceability. Several limiting concepts govern where assent to a record is relevant to establishing the terms of a mass-market license:

a. Unconscionability and Fundamental Public Policy. Even if a party agrees to a mass market license, paragraph (a)(1) makes clear a court may invalidate unconscionable terms or terms against fundamental public policy under rules that apply to all contracts under this Act. Unconscionability doctrine invalidates terms that are bizarre or oppressive and hidden in boilerplate language. See Section 111. For example, a term in a mass-market license for $50 software providing that any default causes a default in all other licenses between the parties may be unconscionable, if there was no reason for the licensee to anticipate that breach of the small license would breach an unrelated larger license between the parties. Similarly, a clause in a mass-market license that grants a license-back of a licensee's trademarks or trade secrets without any discussion of the issue would ordinarily be unconscionable. This section rejects the additional test in Restatement (Second) of Contracts § 211(3).

b. Conflict with Expressly Agreed Terms. Paragraph (a)(2) provides that standard terms in a mass-market license cannot alter terms expressly agreed to between the parties to the license. A term is expressly agreed if the parties discuss and come to agreement regarding the issue and the term becomes part of the bargain. For example, if a librarian acquires software for children from a licensor under an express agreement that the software may be used in its library network, a term in the license that limits use to a single user computer system conflicts with and is overridden by the agreement for a network license. Similarly, in a consumer contract where the vendor promises a "90 day right to a refund" and the parties agree to that, the mass-market license cannot alter that term between those parties. Of course, there must be an agreement and this rule is subject to traditional parol evidence concepts. This rule is consistent with Section 613 where the terms of a publisher's license do not alter the agreement between the end user and the retailer unless expressly adopted by them.

c. Assent and Agreement. Under this Act, a party adopts the terms of a mass market license only if it agrees to the record, by manifesting assent or otherwise. A party cannot do so unless it had an opportunity to review the record before it agrees. Section 112. Paragraph (a)(3) makes clear that, under Section 113, the record must be available for review and called to the person's attention in a manner such that a reasonable person ought to have noticed it before assenting. See Section 113. The opportunity to review the terms must come before assent to them.

Adopting terms of a record under this section for a mass-market license is pursuant to Section 208, and is subject to the limits stated in that section. If the terms of the record are proposed after a party commences performance, they are effective only if the party had reason to know that terms would be proposed and agrees or manifests assent to the terms once proposed. For mass-market licenses, however, even if reason to know exists at the outset, under this section the terms must be made available no later than during the initial performance or use of the information and the person has a statutory right to a return if it refuses the license.

d. Ability to Retain Terms. Paragraph (a)(4) provides additional licensee protection not present in other law. The person presenting terms of a mass-market license must make it possible for the licensee to retain a copy of the agreed license, or to obtain a copy if the contract was presented in a context in which it originally could not have been retained (e.g., presentation at a kiosk with no printing or copying capability). The ability to retain the license terms enables the licensee to have information about its obligations on an ongoing basis. Paragraph (a)(4) provides for a right that typically is not mandated in other general contract law (such as UCC Article 2). It outlines three options in which this capability to retain the agreed record can be achieved:

• •presentation in a form the licensee can keep such as on paper or diskette or in the licensed computer program;

• •presentation in retainable or printable electronic form such as an electronic presentation on a web site which the licensee can print, download, copy or email to a storage device of the licensee, or in the computer program itself; or
• •provision of a copy on timely request from a licensee who is unable to print or store its own copy because the presentation does not allow that to occur.

This paragraph is satisfied if a copy can be kept, printed or stored etc. after the licensee consents to the license, or obtained on request, whether the licensee in fact keeps or prints it at all or at that time, or uses a device that could do so. This is consistent with commentary to the federal Electronic Signatures in Global and National Commerce Act. See 146 Cong. Rec. S5281-06, at S5285, 106th Cong., 2d Sess. (June 16, 2000) (statement of Sen. Abraham).

3. Relevance of a License. The enforceability of a license is important to both the licensor and the licensee. License terms define the product by, for example, distinguishing between a right to use for a single user or with multiple users on a network, or between a right to consumer use or a right to commercial use. Often, the license benefits the licensee, giving it rights that would not be present in the absence of a license or rights that could not be exercised without permission of the owner of informational rights. See, e.g., Green Book International Corp. v. Inunity Corp., 2 F. Supp.2d 112_(D. Mass. 1998). The license allows the licensee to avoid infringement.

The terms of mass-market contracts can be established in many ways. An oral agreement may suffice as would an agreement to terms in a record. Product descriptions may define the bargain without reference to any record containing contractual terms. Parties may leave terms open and agree that the terms may be specified later by a party.

4. Terms Prior to Payment. If a mass-market license is presented before the price is paid, this Act follows general law that enforces a standard form contract if the party assents to it. The fact that license terms are non-negotiable does not invalidate them under general contract law or this Act. A conclusion that a contract is a contract of adhesion may, however, require courts to take a closer look at terms to prevent unconscionability. See, e.g., Klos v. Polske Linie Lotnicze, 133 F.3d 164 (2d Cir. 1998); Fireman's Fund Insurance v. M.V. DSR Atlantic, 131 F.3d 1336 (9th Cir. 1998); Chan v. Adventurer Cruises, Inc., 123 F.3d 1287 (9th Cir. 1997). This Act's concepts of manifest assent and opportunity to review also address concerns relevant to such a review.

5. Terms after Initial Agreement. Mass market licenses may be presented after initial general agreement from the licensee. In some distribution channels this allows a more efficient mode of contracting between end users and remote parties; this is especially important where the remote party controls copyright or similar rights in the information. Enforceability of the license is important to both parties. Under federal law, a mere sale of a copy of a copyrighted work does not give the copy owner a number of rights that it may desire. The limitations in subsection (b) impose significant costs that create incentives for licensors to present terms at the outset when practicable for the distribution channel employed.

Most courts under current law enforce contract terms that are presented and assented to after initial agreement. See, e.g., Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991); ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Hill vs. Gateway 2000 Inc., 105 F.3d 1147 (7th Cir. 1997); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y.A.D. 1998); M.A. Mortenson Co., Inc. v. Timberline Software Corp., 998 P.2d 305 (Wash. 1999); I.Lan Systems, Inc. v. Netscout Service Level Corp., 183 F.Supp.2d 328, 46 UCC Rep.Serv.2d 287 (U.S. Dis. Mass., 2002) ("Step-Saver once was the leading case on shrinkwrap agreements. Today that distinction goes to . . . ProCD. . . 'Money now, terms later' is a practical way to form contracts, especially with purchasers of software" ).

Subsection (b) imposes some added limitations. It allows such terms to be enforceable only if there is agreement, or if there is a manifestation of assent after a chance to review terms and only pursuant to the rule that a party that rejects terms for information must be given a cost free right to say no. This does not mean that the licensee can reject the license and use or copy the information. The right to a return creates a situation equivalent to that which would have existed if the licensee had a chance to review the terms and rejected the license at the preliminary agreement. It does not apply if the licensee agrees to the license. However, a mass-market licensee who agrees to the license but receives a nonconforming product has a right to reject the copy and obtain a refund of the contract fee as a remedy for breach of the contract. See Section 704(b).

a. Timing of Assent. Agreement to the mass-market record must occur no later than during the initial use of the information. This limits the time during which layered contracting may occur in the mass market and reflects customary practices in software and other industries. Of course, any applicable federal law that establishes a right to rescind a contract and return a product is not altered by this Act. Section 105. Also, assent to the record does not alter the licensee's right to refuse a defective product that constitutes a breach of contract. Assent to contract terms is different from acceptance of a copy. "Acceptance" of the copy ordinarily requires a right to inspect it. See Section 608. For mass-market transactions, this Act follows U.C.C. Article 2 on this issue.

b. Cost Free Return. Under subsection (b), if terms are not available for review until after an initial agreement, the party being asked to assent must have a right to reject the terms return the information product. Possible liability for the expense of reinstating a customer's system after review, creates an incentive to make the license or a copy available for review before the initial obligation is created. This Act refers to a return right, rather than a right to a refund, because, under developing technologies, the right may apply to either the licensee or the licensor, whichever is asked to assent to the record. See Section 102(57) (defining the right of return).

The return right under this section includes, but expands on the return right described in Section 113. In this section, the return right is cost free in that it requires reimbursement for reasonable costs of making the return and, if installation of the information was required to review the license, the reasonable costs in returning the system to its initial condition. The fact that this section states an affirmative right in mass market licenses does not affect whether under an agreement or other law, a similar right exists in other contexts.

The expenses incurred in return relate only to the subject matter of the rejected license (the computer information) and do not include goods delivered in the same transaction. Rights regarding the goods are governed by Uniform Commercial Code Article 2 or 2A. The expenses must be reasonable and foreseeable. The costs of return do not include attorney fees or the cost of using an unreasonably expensive means of return or lost income or the like unless such expenses are required to comply with instructions of the licensor. The reimbursement right refers to ordinary expenses, such as the cost of postage.

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

c. Notice of the Right to Return. Subsection (d) provides that notice must be given indicating the person from whom the refund and return can be obtained. The notice may be given in the license or otherwise at a time making it possible for the person refusing the license terms to obtain a return within any reasonable time stated for it or, if no time is stated, a reasonable time. See Section 102(57) (defining the right of return). The purpose is to allow the licensee to assert its rights within the period for a return if it chooses to refuse the license. The section does not require the notice to include address or telephone information because, in mass-market distribution, the identity of the eventual retailer or other person from which a copy was obtained cannot be known in advance. In such cases, the person can be described, for example, as "the store from which you obtained this copy." See also Section 613 (describing when a right of return is due from a dealer) and Section 102(57).

SECTION 210. TERMS OF CONTRACT FORMED BY CONDUCT.

(a) [Source of contractual terms.] Except as otherwise provided in subsection (b) and subject to Section 301, if a contract is formed by conduct of the parties, the terms of the contract are determined by consideration of the terms and conditions to which the parties expressly agreed, course of performance, course of dealing, usage of trade, the nature of the parties' conduct, the records exchanged, the information or informational rights involved, and all other relevant circumstances. If a court cannot determine the terms of the contract from the foregoing factors, the supplementary principles of this [Act] apply.

(b) [Effect of agreed record.] This section does not apply if the parties authenticate a record of the contract or a party agrees, such as by manifesting assent, to the record containing the terms of the other party.

Uniform Law Source: Uniform Commercial Code: Section 2-207 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Court"; "Course of Dealing"; "Course of Performance"; "Information"; "Informational Rights"; "Party"; "Record"; "Term"; "Usage of Trade". Section 112: "Manifesting assent."

Comment

1. Scope of Section. This section deals with contracts formed by conduct, rather than by offer and acceptance or agreement to a record. Contracts formed by conduct arise in various settings. One involves a "battle of forms" in which, under Sections 204 and 205, the exchanged records did not result in an effective offer and acceptance, but both parties engaged in conduct indicating that a contract was formed. If agreed records or an oral offer-acceptance form a contract, this section does not apply simply because agreed records do not cover all relevant terms. In such cases, terms are determined under the general rules of this Act, including appropriate weight for usage of trade, course of performance, and course of dealing. See, e.g., Sections 116(c); 301; 302.

2. Interpret based on Context. This section requires a court to determine contractual terms by considering all commercial circumstances, including the nature of conduct, the informational rights involved, applicable trade usage or course of dealing, and any terms that were expressly agreed without condition or because of an assumption about what would be the agreed performance due from the other party which conditions or assumptions were not met. No hierarchy is established except for that under Section 302. Given the fluid nature of the context, usage of trade and course of dealing have special importance. If a court cannot determine the contract terms from the foregoing, then, the supplemental rules contained in this Act may serve as gap-fillers to supply the terms. Consideration of all factors requires a practical interpretation of the relationship. Restatement (Second) of Contracts § 202(1) (2) (1981); 2 Farnsworth, Contracts § 7.10 (1990). Formalistic rules cannot account for the contextual nuances that exist in the rich environment of transactional practice. This section rejects the so-called "knock-out" rule where terms in records are thrown out and not considered, and are instead replaced by default rules of this Act; that rule is too rigid for information transactions where contract terms often define the product and scope of the grant.

3. Battle of Forms and Conduct. Some information transactions involve an exchange of inconsistent standard forms coupled with conduct of both parties indicating the existence of a contract. One of two results may occur. The first is that a contract is formed by one or both forms and conduct is irrelevant either because the forms do not materially disagree or because a conditional offer or acceptance of one party was agreed to or otherwise adopted by the other. When this occurs, the contract is not within this section. The second possibility is that the records and conduct related to them do not establish a contract (e.g., they materially disagree). See Sections 204 and 205. Such cases are within this section if the conduct of the parties nevertheless creates an enforceable contract. Subsection (a) directs the court to review the entire circumstances regardless of which form was first received or last sent, but including factors such as the terms of the exchanged records and established trade usage, course of dealing, and course of performance.

4. Scope of License. In information transactions, contract terms relating to the scope of the grant define the product being licensed and lie at the core of the agreement. See Comments to Section 102(a)(58). The subject matter (e.g., a copy of software) has entirely different value depending on what rights are granted, but that often cannot be determined from the copy itself (the copy may be license of a single-user or for network use). That being true, it is especially important to give special deference to scope issues in a manner that protects valuable informational rights.

Under subsection (a), the information or informational rights involved are relevant factors. Where there is a significant disagreement about an important element of scope, a court should be careful not to make a determination that creates rights or imposes obligations beyond those actually agreed to by the parties, because that in effect would transfer away valuable property of one party based on a judicial determination made on unclear facts. That risk argues for rejecting any expansive interpretation of ambiguous conduct. Absent clear agreement to the contrary, if a contract is formed by conduct, the court should consider the following principles:

(1) The court should avoid creating a scope that requires the licensor to have or to acquire rights it did not own or have a right to license at the time of contracting, or that exceed the rights the licensor then had. Thus, if the licensor only had the right to grant a license for the Southwest United States, the court should avoid interpreting conduct as indicating a scope that includes rights for the East Coast or forcing the licensor into an infringement.

(2) The court should avoid expanding the licensee's rights beyond the actual agreement of the parties. A court needs to understand and effectuate the importance of this issue from the licensor's standpoint, protecting important property rights which it holds. Thus, the mere fact that the licensee may have used the licensed rights in the East Coast should not lead a court to conclude that the bargain must therefore have included those rights. Such an interpretation could encourage infringement as a means of expanding rights.

(3) The court should avoid making the licensee liable for infringement because of conduct exceeding the scope, if the conduct occurred at a time when the licensee reasonably and in good faith believed that it was acting within the agreed scope. Good faith conduct can be protected in appropriate cases by applying equitable principles without creating a grant that may not have been intended by the licensor.

[SUBPART C. ELECTRONIC CONTRACTS: GENERALLY]

SECTION 211. EFFICACY AND COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE.

(a) [Decision for court.] The efficacy, including the commercial reasonableness, of an attribution procedure is determined by the court.

(b) [Applicable standards.] In making the determination under subsection (a), the following rules apply:

(1) [Procedures established by law.] An attribution procedure established by law is effective for transactions within the coverage of the statute or rule.

(2) [Basis and time for determination.] Except as otherwise provided in paragraph (1), commercial reasonableness and effectiveness is determined in light of the purposes of the procedure and the commercial circumstances at the time the parties agreed to or adopted the procedure.

(3) [Devices and methods.] An attribution procedure may use any security device or method that is commercially reasonable under the circumstances.

Uniform Law Source: Uniform Commercial Code: Sections 4A-201; 202 (1998 Official Text).

Definitional Cross References: Section 102: "Attribution procedure."

Comment

1. Scope of Section. This section provides standards for determining the efficacy of an attribution procedure or whether it is commercially reasonable.

2. Decision of the Court. Issues of whether a particular procedure is commercially reasonable or otherwise about its efficacy in a particular context are decisions made by the court. This Act does not require a commercially reasonable attribution procedure or adopt any one type of procedure as reasonable or otherwise efficacious. Other law may do so, as may the agreement of the parties.

3. Nature of an Attribution Procedure. Evolving technology and commercial practice make it impractical to predict future developments and unwise to preclude developments by a narrow statutory mandate describing what type of procedure is appropriate. This Act relies on the parties to select or use an appropriate procedure. If an attribution procedure is established by agreement or adopted by both parties, assent is the predicate for allowing the procedure to affect substantive rights subject to normal restrictions on enforcement of contract terms, such as the doctrine of unconscionability. A procedure of which one party is not aware does not qualify as having been agreed to or adopted by the parties as an attribution procedure. However, parties dealing for the first time may adopt a procedure at that time, there is no requirement of agreement in advance. Similarly, a procedure may be established by one party in connection with a third person (such as in the issuance of a digital signature, or the creation of an attribution procedure to be used among a group of member companies) and adopted in a particular transaction such as where another party accepts and relies on the issued digital signature.

In some cases, statutes or regulations define a particular attribution procedure as appropriate or as applicable to a given context. These laws, such as digital signature statutes, establish by law a procedure that qualifies as an attribution procedure in this Act and that, under paragraph (1) are per se effective or commercially reasonable within the scope of coverage of the statute or regulation.

4. Efficacy and Commercial Reasonableness. The general idea of efficacy or commercial reasonableness is that the procedure be a reasonably effective method in the commercial context reasonably suited to the task for which it is used. This does not require the procedure to be state of the art, the most reasonable procedure, or an infallible procedure. The decision must take into account the choices of the parties as well as the effectiveness and cost relative to the value of the transactions. How one gauges efficacy or commercial reasonableness depends on a variety of factors, including the agreement, the choices of the parties, technology, the types of transactions affected by the procedure, sophistication of the parties, volume of similar transactions engaged in, availability of feasible alternatives, cost and difficulty of utilizing alternative procedures, and procedures in general use for similar types of transactions. The commercial reasonableness concept is similar to that in Uniform Commercial Code § 4A-202(c) (1998 Official Text). In most cases, the efficacy of a procedure is related to whether it is a commercially reasonable procedure. The quality of an attribution procedure may reasonably be tailored to the particular transaction and the degree of risk involved. Additionally, if a procedure results from a negotiated agreement of the parties or decisions of informed commercial entities entering a relationship, it should receive deference. This flows from the principle of contractually assumed risk and the principle that the parties' agreement should ordinarily be enforced. The same principle may apply in non-negotiated situations. If two parties generally aware of the risks of a particular procedure, agree to use the procedure for a particular transaction, they have in effect concluded that the procedure is sufficiently effective or commercially reasonable in their context to accept the risks.

SECTION 212. DETERMINING ATTRIBUTION.

(a) [When attribution established.] An electronic authentication, display, message, record, or performance is attributed to a person if it was the act of the person or its electronic agent, or if the person is bound by it under agency or other law. The party relying on attribution of an electronic authentication, display, message, record, or performance to another person has the burden of establishing attribution.

(b) [Proving attribution.] The act of a person may be shown in any manner, including a showing of the efficacy of an attribution procedure that was agreed to or adopted by the parties or established by law.

(c) [Context determines effect.] The effect of an electronic act attributed to a person under subsection (a) is determined from the context at the time of its creation, execution, or adoption, including the parties' agreement, if any, or otherwise as provided by law.

(d) [Failure to use procedure.] If an attribution procedure exists to detect errors or changes in an electronic authentication, display, message, record, or performance, and was agreed to or adopted by the parties or established by law, and one party conformed to the procedure but the other party did not, and the nonconforming party would have detected the change or error had that party also conformed, the effect of noncompliance is determined by the agreement but, in the absence of agreement, the conforming party may avoid the effect of the error or change.

Definitional Cross References: Section 102(a): "agreement"; "attribution procedure"; "authentication"; "electronic"; "electronic agent"; "party"; "person"; "record".

Comment

1. Scope of Section. This section deals with when an electronic authentication, message, record or performance is attributed to a particular person and with the consequences of failure to follow a procedure intended to detect errors. Attribution to a person means that the electronic event is treated in law as having come from that person.

2. Nature of Attribution. Subsection (a) clarifies that the party seeking to attribute the source of an electronic authentication, message, record or performance to a particular party bears the burden of doing so. "Burden of establishing" means "the burden of persuading the trier of fact that the existence of a fact (e.g., attribution) is more probable than its non-existence." In effect, a party (either the licensor or the licensee) that desires to attribute an order or a shipment or license to a particular party bears the burden and the risk of being able to do so.

Attribution might involve reliance on agency law principles. In addition, the reference in subsection (a) to "other law" makes clear that the concept covers circumstances in which a person is bound by the act of another even though the acting person might not qualify as an agent. For example, if a woman gives her on-line account password to her brother so that he may use the account, his acts will be attributed to her even though he is not necessarily her agent. If he steals the password, she is not bound by his actions unless other law requires her to bear the consequences of his actions (e.g., by contract or under some state electronic signature statutes her liability may be allocated to her, or a cause of action for negligence might exist in some circumstances).

3. Nature of Proof. Subsection (b) states the principle that the efficacy and other characteristics of an attribution procedure used by the parties are part of proof of attribution. The role of an attribution procedure agreed to or used by the parties varies depending on the character of the procedure. Compliance with a commercially reasonable attribution procedure that has a level of effectiveness suitable to that context may be treated by the court as carrying the burden of establishing attribution referred to in subsection (a), subject to rebuttal by appropriate evidence, such as by a showing that the party in fact had no role in causing or permitting the electronic authentication, message, record or performance to occur. For example, if the parties agree to an attribution procedure, the party seeking to rely on attribution to the other has the burden of establishing the agreement, the fact that it was followed in good faith and other relevant attributes of the procedure. Having done that, under general law, the burden may pass to the other party to establish that neither he nor a person with authority to act were responsible for the message or performance. On the other hand, a procedure with very limited effectiveness not reasonably suited to the context might have no effect at all in the evidentiary mix. Of course, this all depends on existing law regarding the burden of establishing a fact; this Act does not change that law.

4. Role of Agreement. This section is subject to contrary agreement. An agreement here may have the effect of creating an attribution procedure that later plays a role in proving to whom the message is attributed. The agreement, however, may also deal with the effect of the procedure itself, and thereby override the rules in this section. For example, an agreement between a law firm and West Publishing may provide that the law firm is responsible for the costs associated with any use for database access of the identification code issued to it. The identification code is an attribution procedure. Absent agreement on its effect, the effect of its use would be controlled under this section. In the hypothetical case, however, the agreement itself specifies the effect of use of the code and that agreement controls. No special language is necessary to achieve this result: the agreement is enforceable under the same standards as any other term of an agreement. Thus, it must not be unconscionable or violate a fundamental public policy. See Sections 105 and 111.

5. Failure to Use. Subsection (d) deals in a limited way with the effect of a failure by one party to conform to an attribution procedure. If the sender complies, but the recipient does not, the sender is entitled to its rights or damages under any agreement between the parties regarding the attribution procedure and its effects; in the absence of an agreement, the complying party (sender) may choose not to be bound by an error that would have been detected through compliance by the other party (recipient).

SECTION 213. ELECTRONIC ERROR: CONSUMER DEFENSES.

(a) [Electronic error defined.] In this section, "electronic error" means an error in an electronic message created by a consumer using an information processing system if a reasonable method to detect and correct or avoid the error was not provided.

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

(1) promptly on learning of the error:

(A) notifies the other party of the error; and

(B) causes delivery to the other party or, pursuant to reasonable instructions received from the other party, delivers to another person or destroys all copies of the information; and

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

(c) [When other law applies.] If subsection (b) does not apply, the effect of an electronic error is determined by other law.

Definitional Cross References: Section 102: "Automated transaction"; "Consumer"; "Consumer contract"; "Copy"; "Delivery"; "Electronic"; "Electronic message"; "Good Faith"; "Information"; "Information processing system"; "Informational Rights"; "Notifies"; "Party"; "Person"; "Receive".

Comment

1. Scope of Section. This section creates a statutory electronic error correction procedure for consumers that supplements common law concepts of mistake. The section does not displace the common law of mistake or alter law concerning transactions that do not involve a consumer. It does not apply to transactions excluded from this Act. The procedure created here establishes a rule that avoids the complexity and uncertainty of relying solely on common law principles about mistake in an automated world. In common law in many states, a party making a unilateral mistake is responsible for its consequences. This section creates a consumer protection that avoids such decisions.

2. Electronic Errors: Defined. An "electronic error" contemplates a situation in which a consumer's conduct results in an error in an electronic message. This section allows the consumer, by prompt action, to avoid the effect of the mistake. The defense does not apply if the electronic system with which the consumer is working provides a reasonable means to correct or avoid errors. Thus, a consumer's mistake in erroneously entering "11" as the number of copies desired may be an error, but does not come within this section if the automated ordering system with which the consumer interacts requires confirmation of the quantity or reasonably allows the consumer to correct any error before sending the order. The rule thus provides an incentive to establish error-correction procedures in automated contracting systems and provides protection to the consumer where such procedures are not present.

What is a reasonable procedure for correcting errors depends on the commercial context, including the extent to which the transaction entails immediate reactions. For example, in a transaction which occurs over a several day period, it may be reasonable to require a verification of a bid or order before it is placed, while in an on-line, real time auction, reconfirmation may not be possible. A reasonable procedure may entail no more than requiring two separate indications confirming that the bid should be entered or, where the formatting allows correction, requesting that the consumer check and correct the bid before the "Bid Now" button is pressed. As elsewhere, the idea of a reasonable procedure here does not require use of the most effective procedure, of special detection software or even the most reasonable, it requires that, all things taken into account, the procedure is commercially reasonable.

3. Avoiding the Effect of Error. If an electronic error occurs, a consumer can avoid responsibility for the unintended message if the consumer acts promptly. However, the message must not have been intended. Error avoidance is not a right to rescind a contract because of second thoughts.

To avoid the effects of an electronic error, the consumer must act promptly on learning of the error or of the other party's reliance. The consumer must notify the other party of the error and deliver back, at the consumer's cost, any copies of information received in the same condition as received. Return of copies is not required if the other party reasonably instructs the consumer to destroy the copies. However, the consumer must act promptly in a manner that returns the other party to the position that would have been true if the error had not occurred. Compare European Union Distance Contract Directive (no rescission right for consumer if software is not returned unopened).

This defense builds on equity principles that permit a party to avoid the consequences of its error if the error causes no detrimental effect to another party and does not give a benefit to the person making the mistake. The defense does not apply if the consumer used the information or otherwise received a benefit from it or the error. Since there may be unavoidable detrimental effects on the party who received an erroneous message (e.g., costs of filling erroneous orders), courts must apply this rule with care. The basic assumption is that the defense works when there is no detrimental effect on the person who did not make the error, but that assumption is particularly suspect in cases where the nature of the information product makes for high costs to the provider or risk of fraud worked by the consumer.

Illustration 1: Consumer intends to order one game from Jones' web site. Consumer types 11. Jones electronically delivers 11 games or causes their shipment with an overnight courier. The next morning, Consumer notices the mistake. He immediately sends an e-mail to Jones describing the problem, offering to immediately return the copies at Consumer's expense; he does not use the games. Under this section, there is no obligation for 11 copies.

Illustration 2: Same facts as in Illustration 1, except that Consumer did intend to order 11 copies and merely changed his mind. The section does not apply.

Illustration 3: Same as in Illustration 1, but Jones' system asks Consumer to confirm an order of 11 copies. Consumer confirms. There was no "electronic error." The procedure reasonably allowed for correction of the error. The conditions for application of this section are not met.

4. Transactions Not Within the Section. This section does not alter law in transactions that do not involve consumers or where consumers use electronic agents. The diversity of commercial transactions make a simple rule such as that stated here inappropriate because of the different patterns of risk and the greater ability of commercial parties to develop tailored solutions to the problem of errors. A court addressing electronic errors in these other contexts should apply general common law. The existence of the defense in this section for a consumer does not affect remedies under the general law of mistake, including in cases where the consumer does not qualify for the defense.

5. Relation to other Law. This section does not alter other consumer protection laws. In addition, it does not alter credit card or other rules regarding the responsibility of a consumer or a merchant to parties who provide payment or credit services relating to the transaction. Financial services transactions are excluded from this Act. Thus if an error by a consumer causes an order for ten copies, rather than one copy, as between the consumer and the licensor, this section applies. However, if the transaction were made with a credit card, the consumer's responsibility to the card issuer under the credit card remains governed by law applicable to that transaction and by the card issuer's disputed charge resolution procedures.

SECTION 214. ELECTRONIC MESSAGE: WHEN EFFECTIVE; EFFECT OF ACKNOWLEDGMENT.

(a) [Electronic record effective when received.] Receipt of an electronic message is effective when received even if no individual is aware of its receipt.

(b) [Effect of acknowledgement.] Receipt of an electronic acknowledgment of an electronic message establishes that the message was received but by itself does not establish that the content sent corresponds to the content received.

Definitional Cross References: Section 102: "Electronic"; "Electronic message"; "Information"; "Receive".

Comment

1. Scope of the Section. This section deals with the timing of effectiveness of electronic messages and with the impact of an acknowledgment. It does not deal with questions of to whom the message is attributed or with whether the content of the message is effective.

2. Time of Receipt Rule. Subsection (a) adopts a time of receipt rule; rejecting the mailbox rule for electronic messages and resolving uncertainty about what common law rule would otherwise govern. See Section 102 (definition of "receipt"). This time-of-receipt rule reflects both the relatively instantaneous nature of electronic messaging and places the risk on the sending party if receipt does not occur. As used in this Section, "effectiveness" of a notice parallels the usage in Uniform Commercial Code § 1-201(27) (1998 Official Text). The receipt of the message is "effective" when received, but the receipt being effective does not create a presumption that the message contains no errors, that its content is adequate or that it was sent by any particular person. Whether the message formed a contract is determined by ordinary offer and acceptance rules and whether an existing contract has been modified is determined by ordinary rules on modification. Neither effect happens simply because receipt of a message is effective without more.

The message is "effective" when received, not when read or reviewed by the recipient, just as written notice is received even if not read or acknowledged. This applies traditional common law theories to electronic commerce. In electronic transactions, automated systems can send and react to messages without human intervention. A rule that demands human assent would add an inefficient and error prone element or inappropriately cede control to one party.

3. Effect of Acknowledgment. Acknowledgment is not acceptance, although an acceptance can also be treated as an acknowledgment. Acknowledgment proves receipt but does not create any presumption about the identity of the person sending the acknowledgment. That can be established by an attribution procedure agreed to or adopted by the parties or established by law, but this section does not create any presumptions. Questions about the accuracy or the general content of the received message also are not treated here. Of course, by agreement the parties address all of these issues.

SECTION 215. IDEA OR INFORMATION SUBMISSION.

(a) [Submissions without prior agreement.] The following rules apply to a submission of an idea or information for the creation, development, or enhancement of computer information which is not made pursuant to an existing agreement requiring the submission:

(1) [Receipt does not form agreement.] A contract is not formed and is not implied from the mere receipt of an unsolicited submission.

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

(3) [Effect of procedures.] If the recipient seasonably notifies the person making the submission that the recipient maintains a procedure to receive and review submissions, a contract is formed only if:

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

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

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

Definitional References: Section 102: "Agreement"; "Information"; "Informational rights"; "License"; "Party"; "Record"; "Release".

Comment

1. Idea Submissions: General Premise. This section deals in a limited way with an important issue in information industries: submissions of ideas. It section leaves undisturbed doctrines dealing with equitable remedies, but clarifies contract law. Subsection (a) pertains to unsolicited submissions and to the effect of express submission procedures. Subsection (b) pertains to standards for enforcement of idea submission agreements, whether express or implied.

2. Idea Submissions: No Prior Agreement. Subsection (a) deals with submissions not pursuant to a prior agreement. Subsection (a)(1) states an obvious contract law principle. If the submission was not solicited, mere receipt of the submission does not create a contract. The receiving party may have an obligation to return copies in some cases, but unilateral action of one party cannot impose obligations in contract on the recipient. Of course, simply because an idea or information is solicited does not mean that there is an agreement or a contract with respect to that submission. The absence of a contract is clear where, for example, a party merely maintains a website inviting clients and licensees to contact it but not indicating an obligation to pay or otherwise compensate for ideas received.

As indicated in subsection (a)(2), this is true even if the industry in which the recipient functions ordinarily relies on ideas. Contracts only arise by agreement by the parties.

For purposes of this section, an idea is not solicited simply because the recipient maintains a general interactive customer contact and information site at which clients and licensees may supply information, complaints or suggestions about its products. An idea or information is solicited if the recipient has specifically requested information from another party on a particular topic with some undertaking to pay for such solicited submission.

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

3. Idea Disclosure. Subsection (b) deals with the classic circumstance in which implied in fact contracts might arise. An agreement to disclose an idea carries with it, in the absence of contrary terms, the assumption that the idea has value or uniqueness. That value exists if the idea is concrete, confidential and novel. If, for example, there is an agreement for a party to submit an idea for enhancing the success of audiovisual works in return for a fee, the agreement is not an enforceable contract if the idea is "draw more attractive images." This rule adopts majority view and cases such as Oasis Music Inc. v. 100 USA, Inc., 614 N.Y.S.2d 878 (N.Y. 1994); Smith v. Rerion Corp., 541 P.2d 663 (Nev. 1975); Burgess v. Coca-Cola Co., 55 U.S.P.Q.2d 1506 (Ga. App. 2000). The recipient cannot recover payments it already made. Rather, the default rule is that the provider of the non-novel submission cannot enforce any future obligations as to the submitted idea. The basic principle is that a non-novel idea is not adequate consideration for a contract and that a proponent of an idea implicitly represents that the idea has value. This is not met in a case of an idea that is not concrete, confidential and novel. Of course, however, if the receiving party expressly agreed that it would pay regardless of the nature of the idea, the default rule stated in subsection (b) is over-ridden by that express agreement.

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

Nothing in this section precludes enforcement of an agreement for idea submission that does not hinge on the uniqueness of the proposed submission. In deciding whether such agreement exists, a court must consider the fundamental notion that a party does not implicitly contract away its rights, without a fee, to use information which is not novel, confidential and concrete merely because it contracted for "disclosure" of such material.

4. Trade Secret and Other Confidential Disclosures. The rule stated in subsection (b) applies to idea submissions. It does not apply to ordinary commercial cases involving confidential disclosures of trade secret or other information. The formation and enforcement of such contracts is under general contract formation law and, when applicable, trade secret law. The Restatement (Third) of Unfair Competition suggests that, for purposes of tort claims (e.g., misappropriation law), the doctrines that have developed in many states relating to idea submissions should be brought within trade secret law. This Act does not deal with that issue. It expressly preserves trade secret and similar law, leaving unaffected any controversy that this Restatement suggestion might engender. The rules here deal only with contract law and follow the widely accepted majority rule with respect to idea submissions.

PART 3

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

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

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

Uniform Law Source: Uniform Commercial Code: Sections 2A-202; 2-202 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Course of dealing"; "Course of performance"; "Court"; "Party"; "Record"; "Term"; "Usage of Trade."

Comment

1. Scope of Section. This section adopts the parol evidence rule from Uniform Commercial Code § 2-202 (1998 Official Text).

2. Record as Final Expression. The basic principle is that an agreed record of the contract is the best and primary source determining the terms of the agreement of the parties. This section excludes evidence of other alleged terms or agreements that contradict the terms of a record intended as a final expression of the agreement with respect to the terms covered in the record or with respect to terms on which confirmatory records agree. The record need not be intended as the only statement of the agreement on all terms, but to have this rule apply it must be intended as final on the terms covered.

An alleged term or agreement is contradictory if its substance cannot reasonably coexist with the substance of the terms of the record. Thus, an alleged term that calls for completion of a software project on July 1 contradicts a term of a record calling for completion on June 10. The two terms cannot reasonably coexist as part of the same agreement. On the other hand, an alleged term that specifies the processing capacity of the software does not contradict the terms of a record that does not make reference to that issue. Of course, the fact that the term does not contradict the record means only that evidence of it can be admitted. It does not indicate whether the alleged term was actually agreed by the parties.

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

3. Practical Construction. Paragraph (1), however, makes admissible evidence of course of dealing, usage of trade, and course of performance to explain or supplement the terms of any record stating the agreement of the parties. This does not depend on a prior determination that the language of the record is ambiguous. Instead, these sources of interpretation are allowed in order to reach an accurate understanding of the parties' intent as to their agreement. Records of an agreement are to be read on the assumption that the course of prior dealings between the parties and the usage of trade were taken for granted when the record was drafted. Unless negated by the record, they are an element of the meaning of the words used. Similarly, the course of actual performance by the parties may be the best indication of what the parties intended the record to mean.

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

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

5. Language. This section rejects the premise that the language used in a record necessarily has the meaning attributable to such language by rules of construction existing in the law rather than the meaning that arises out of the commercial context in which it was used. See Section 302.

SECTION 302. PRACTICAL CONSTRUCTION.

(a) [Consistent construction required.] The express terms of an agreement and any course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. However, if that construction is unreasonable:

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

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

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

(b) [Applicable usage of trade.] An applicable usage of trade in the place where any part of performance is to occur must be used in interpreting the agreement as to that part of the performance.

(c) [Admissibility: notice to other party.] Evidence of a relevant course of performance, course of dealing, or usage of trade offered by one party in a proceeding is not admissible unless and until the party offering the evidence has given the other party notice that the court finds sufficient to prevent unfair surprise.

(d) [Question of fact.] The existence and scope of a usage of trade must be proved as a question of fact.

Uniform Law Source: Uniform Commercial Code: Section 2A-207; Section 2-208; Section 1-205 (1998 Official Text). Revised.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Course of dealing"; "Course of performance"; "Knowledge"; "Party"; "Term"; "Usage of trade".

Comment

1. Scope of the Section. This section is based on Uniform Commercial Code §§ 1-205; 2-208 (1998 Official Text), and provides that in interpreting an agreement a court should refer to relevant indicia of the context in which the parties formed and performed their agreement.

2. Construction based on Performance. This section adopts the premise that the parties themselves know best what they meant by the words of their agreement and that their actions under that agreement are an important indication of that meaning. Behavior, of course, is subordinate to express contract terms. However, course of performance as well as usage of trade and course of dealing provide factors useful in determining the meaning of the "agreement."

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

4. Relationship to Waiver. A pattern of conduct may provide insight into the meaning of the agreement or represent a waiver of a term. The preference in this Act is in favor of a "waiver" (if the elements of waiver are present) whenever this construction is reasonable because this interpretation preserves the flexible character of commercial contracts and prevents surprise or other hardship. This is true because a waiver can be retracted as to future performance. See Sections 702; 303 Comment 5. In contrast, treating a pattern of conduct as providing a binding interpretation of the agreement results in specifying a meaning that cannot be unilaterally retracted by a party.

5. Order of Interpretation. Subsection (a) sets out the order of preference among express terms, course of performance, course of dealing, and usage of trade. Express terms of an agreement always govern. Course of performance and course of dealing are the next preferred, respectively, because each relates to the behavior of the particular parties. These all supersede the default rules of this Act.

6. Place of Performance. Subsection (b) indicates that, as applied to a performance, any applicable usage of trade is determined as meaning what it may fairly be expected to mean to parties in a given locality and involved in the particular type of commercial transaction in that locality. However, the alleged usage of trade must meet the definition of that term, including in reference to its being understood by all parties to the contract as to that place. See Uniform Commercial Code § 1-205, comment 4 (1998 Official Text).

SECTION 303. MODIFICATION AND RESCISSION.

(a) [Consideration not required.] An agreement modifying a contract subject to this [Act] needs no consideration to be binding.

(b) [No oral modification terms.] An authenticated record that precludes modification or rescission except by an authenticated record may not otherwise be modified or rescinded. In a standard form supplied by a merchant to a consumer, a term requiring an authenticated record for modification of the contract is not enforceable unless the consumer manifests assent to the term.

(c) [When record required.] A modification of a contract and the contract as modified must satisfy the requirements of Sections 201(a) and 307(f) if the contract as modified is within those provisions.

(d) [Waiver.] Subject to Section 702, an attempt at modification or rescission which does not satisfy subsection (b) or (c) may operate as a waiver.

Uniform Law Source: Uniform Commercial Code: Sections 2A-208; 2-209 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Authenticate"; "Consumer"; "Contract"; "Merchant"; "Record"; "Standard form"; "Term".

Comment

1. Scope of the Section. This section deals with modifications of contracts and agreed limits on the ability to modify. It is subject to Section 304 on changes made pursuant to contract terms allowing changes. The section generally follows Uniform Commercial Code § 2-209 (1998 Official Text), but makes various changes and moves provisions on the relationship between attempted modification and waiver to Section 702. On the relationship between this and terms presented for later agreement, see Section 208, Official Comment 4.

2. Role of Contract Modifications. Subsection (a) makes modifications of contracts effective without regard to any lack of consideration. The modification must be in an agreement and there must be assent by both parties. As in Uniform Commercial Code § 2-209 (1998 Official Text), there is no requirement that a modification be proposed in good faith. A court should not be asked to accept or invalidate an agreed modification based on its view of the fairness of the commercial motivations of the party proposing the modification or whether the agreement is fair. The fact that there must be agreement protects against overreaching and abuse, allowing courts to apply ordinary concepts related to fraud or duress when appropriate.

3. Contract Terms Prohibiting Oral Modification. Under subsection (b), a contract term that bars modification or rescission of an agreement except in an authenticated record is enforceable. See Uniform Commercial Code § 2-209 (1998 Official Text). This type of contract term has great importance in commercial relationships especially in contracts involving ongoing performances. Contractually preventing modifications that are not in an authenticated record plays an important role in preventing false allegations of oral modifications, difficulties of establishing terms, and avoiding circumvention of express agreements by alleged modifications. For example, a term that provides "no modification without a signed writing" precludes modification of an agreement by a later mass-market license not signed by the licensee. Morgan Laboratories, Inc. v. Micro Data Base Systems, Inc., 1997 WL 258886, 41 U.S.P.Q.2d 1850 (N.D. Cal. 1997). Such terms permit parties to make their own statute of frauds that controls their risk of oral or other unsigned modifications. The language of the contract term controls, but the presumption should be that electronic records and signatures are included within contractual terms that generally refer to signatures or writings. However, if a term of a contract limits modifications to a "written signature on paper," an electronic record or an electronic authentication is not sufficient.

Subsection (b) adopts the policy of Uniform Commercial Code § 2-209 (1998 Official Text) that in consumer transactions such terms are enforceable only if the consumer assents specifically to the term. U.C.C. Article 2 requires a consumer to sign the term. This Act substitutes the requirement of manifesting assent to better fit electronic commerce. The limitation in subsection (b) does not apply to a transaction that is not a consumer transaction.

4. Statute of Frauds. Under subsection (c), the contract as allegedly modified and the modification itself must satisfy the statute of frauds and Section 307(f) to be enforceable. This prevents unfounded claims of oral modification that alter the contract in a way that derogates Section 201(a) or Section 307(f). Thus, the alleged modification cannot, without an authenticated record, transform a $6,000 two-year license of computer information into a perpetual license, nor can it alter the subject matter of a license for a multi-media product to include an entirely different subject matter. On the other hand, a modification that changes the delivery date without altering the term or subject matter, need not be in an authenticated record if the original agreement was in such a record. In that case, the original record suffices under Sections 201 and 307 as to the modified contract.

Partial performance under the original agreement validates the original agreement, but if the modification alters subject matter, duration, scope, price or other significant terms, that partial performance does not validate the modified contract. If the contract as modified does not satisfy the statute of frauds, the original agreement that did satisfy Section 201 constitutes the contract.

The modifications must also satisfy any other applicable rules limiting the effectiveness of agreed terms. Thus, disclaimers of warranties must meet the disclaimer rules and modifications of scope must comply with Section 307.

5. Waiver. A party whose conduct is inconsistent with a contract term may place itself in a position from which it may no longer assert that term until it gives notice to the other party that it intends to do so. That principle of waiver is discussed in Section 702 and applies to contract terms requiring a signed record for modification. But waiver occurs only if the conduct induced the other party reasonably and in good faith to rely and that reliance precludes changing the position as to past conduct or as to future conduct unless steps are taken to cut off reasonable reliance on the waiver as to the future. See Autotrol Corp. v. Continental Water Systems, 918 F.2d 689, 692 (7th Cir. 1990); Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir. 1986). Reasonableness of such behavior, of course, must be considered in light of the circumstances, including the fact of a "no waiver" clause. Courts should be slow to find waiver of anti-waiver provisions in general and "no-oral modification" clauses in particular. See 1 White & Summers, Uniform Commercial Code 1-6, pp. 41-42 (4th Ed. 1995). With "no-oral modification" clauses, it is more likely that the conduct constitutes a waiver of the substantive term for a particular performance, rather than of the "no-oral-modification" clause itself which would open up the entire contract based on behavior affecting one part. That interpretation is consistent with Section 302, preferring a waiver analysis over a modification analysis in close cases.

SECTION 304. CONTINUING CONTRACTUAL TERMS.

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

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

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

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

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

(d) [When other law applies.] The enforceability of changes made pursuant to a procedure that does not comply with subsection (b) is determined by the other provisions of this [Act] or other law.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Good faith"; "Mass-market transaction"; "Notice"; "Notify"; "Party"; "Term"; "Termination".

Comment

1. Scope of the Section. This section deals with contracts involving ongoing performances by one or both parties. It clarifies enforceability of agreed methods that allow changes in terms, but does not alter law or agreements outside this Act which place restrictions on the ability to change terms.

2. Continuing Terms. Subsection (a) states two important principles.

First, contract terms cover all performances under the contract whenever the agreement extends to subsequent performances. A warranty disclaimer in a contract for ongoing use of a website applies to all subsequent uses of the site pursuant to that contract. Of course, if each separate access involves a separate access contract, the terms of the first agreement do not cover the second, absent express agreement that it does so.

Second, contract terms can be changed pursuant to procedures established by the contract. The procedures might relate to actions of a third party (e.g., changes in applicable government regulation), to an external standard (e.g., a price index), or to changes implemented by a party pursuant to an agreed procedure. Performance under a contractual right to change terms is subject to the duty of good faith. The affirmative principle is that, in a commercial agreement, if parties agree to a procedure by which terms can be altered, they are bound by that agreement and changes made pursuant to that agreed procedure are binding unless the proposal violates standards of good faith, including commercial fair dealing.

3. Changes in Terms. Subsection (b) sets out procedures that, if established by agreement and followed in fact, make a contractual change of terms effective. It creates incentives for contracts that provide more protection to the party that is not changing the terms than are required in common law. If parties agree that changes can be made pursuant to a specified procedure and the provisions of this subsection are met, the changes made in good faith pursuant to that procedure are effective; this section excludes any argument in such cases that the contract containing such a procedure fails for lack of mutuality. If subsection (b) is not met, however, neither the contract nor the changes are rendered unenforceable by this Act, but the parties do not benefit from the rule in this subsection.

The subsection addresses important practices in online and other contracts, such as outsourcing agreements, where there is a need to efficiently modify terms over time. It does not alter agreements or consent orders which limit or expand the ability to make changes in an ongoing contract. This subsection deals only with agreed terms that permit changes to be made. It does not create a unilateral right to change terms if the parties have not agreed to an applicable procedure.

Contract terms allowing procedures for changes are the converse of contractual provisions restricting modification other than in an authenticated record. They are analogous to cases in which an agreement leaves the particulars of performance to be specified by one party. They are enforceable under Section 305 and under U.C.C. Article 2. The need for enforceability of such changes is especially important in electronic commerce because this area of commerce is subject to evolving and unpredictable rules and circumstances that may require adjustment of performance, risk allocation, and other characteristics of a relationship. The requirement that the change be made in good faith requires that the change occur in a manner consistent with commercial standards of fair dealing; this prevents the party making the change from taking undue advantage.

a. Relationship to Other Rules. To be effective under this section, the procedures described in subsection (b) must be pursuant to a contract term authorizing a procedure for changes. The terms of an ongoing contract may, of course, be altered in other ways, such as by an agreed modification. Similarly, principles of waiver can affect what are the effective terms of the agreement.

b. Contracts Generally. Under subsection (b)(1), a change becomes part of the contract if it meets the following conditions:

• • it is proposed in good faith, which includes meeting standards of commercial fair dealing;
• • it is proposed pursuant to an agreed procedure;
• • the procedure reasonably notifies the other party of the change.

However, since this Act preserves substantive consumer statutes (Section 105), if a consumer statute specifies a method for notice of changes, this Act does not displace that rule.

Subsection (b)(1) requires that the procedure reasonably notify the other party of the change. What constitutes reasonable notification depends on the commercial circumstances and general commercial standards of practice with respect to that circumstance. Posting at an agreed location designated for that purpose would ordinarily suffice as commercially reasonable notification. While there is no requirement that individual changes be separately singled out for special affirmative notice, such may be appropriate under this standard for material changes such as a change in price. Often, reasonable notification requires action before the change is effective, but in some emergency situations, notice that coincides with the change or follows it is sufficient (e.g., blocking access to a virus infected site or a change in access codes to prevent third party intrusions). A procedure for posting changes in a designated, accessible location will ordinarily suffice. The overall context of the contract must be considered.

This section does not require that there be a right to withdraw from the contract in commercial, non-mass-market transactions. This is because, in cases such as outsourcing agreements or other ongoing commercial relationships, the blanket requirement of a withdrawal right cannot meet the varied and important commercial circumstances that might arise. For example, in some cases, the services provider makes extensive financial commitments in based on a multiyear contract term and requiring that a withdrawal right exist in those situations would seriously disrupt commercial expectations.

c. Mass-Market Transactions. In mass-market transactions, subsection (b)(2) authorizes an agreed procedure only if standards of good faith and reasonable notification are met and the consumer or other mass-market licensee has a right in good faith to withdraw from the contract with respect to future performances. The termination right must be exercised in good faith and for a material change adverse to the licensee. Price changes are material in all cases. Other changes may be material, such as a significant change in the agreed hours during which the on-line system is available. Of course, a reduction in price or other generally beneficial change does not require a right to terminate.

The right to withdraw must be without penalty, but the licensee must, of course, perform the contract prior to the date of withdrawal (e.g., pay all sums due). In many licenses that entail continuing performance, the contract may be subject to termination at will. Subsection (b) does not alter that rule or the rights of either party under it.

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

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

(1) [Limitations on specification.] Specification must be made in good faith and within limits set by commercial reasonableness.

(2) [ Effect of delay.] If a specification materially affects the other party's performance but is not seasonably made, the other party:

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

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

Uniform Law Source: Uniform Commercial Code Section 2-311 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Good faith"; "Seasonable"; "Party."

Comment

1.Scope of Section. This section follows Uniform Commercial Code § 2-311 (1998 Official Text). It deals with contracts in which one party reserves or is granted the right to specify terms after the agreement. On the relationship between this and terms presented for later agreement, see Section 208, Official Comment 4.

2. Enforceability. This section is an express recognition of one form of layered contracting in which terms are established after the initial agreement, rather than at the time of initial agreement. If the initial agreement is sufficiently definite to form a contract, this section allows parties to leave particulars of performance to be filled in by a party without running the risk of having the contract invalidated for indefiniteness. The party empowered to specify the missing details is required to exercise good faith and to act in accordance with commercial standards so that there is no surprise; the range of permissible specifications is limited by what is commercially reasonable.

The agreement that permits one party to specify terms may be found in a course of dealing, usage of trade, implication from the circumstances or in explicit language used by the parties. Thus, acquisition of information through a telephone order where there is reason to know that terms to be provided by the other party will indicate details of the contractual arrangement may fall within this section. Supplied under this section, the details supplied are bounded by trade use and commercial expectations (as well as by the terms actually agreed by the parties). They do not, however, require that the other party agree to the terms since, by definition, the original agreement constitutes assent to the later terms under the limitations described here.

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

SECTION 306. PERFORMANCE UNDER OPEN TERMS. A performance obligation of a party that cannot be determined from the agreement or from other provisions of this [Act] requires the party to perform in a manner and in a time that is reasonable in light of the commercial circumstances existing at the time of agreement.

Definitional Cross References: Section 102: "Agreement"; "Party".

Comment

1. Scope of Section. This section provides a general interpretation rule for issues not covered by the agreement or other sections of this Act. It follows Article 2 of the Uniform Commercial Code (1998 Official Text).

2. Commercial Context. Interpretation of contracts must be based on the commercial context. If the agreement or this Act does not provide content for a term left open by the parties, a court must adopt a standard that is reasonable in light of the commercial circumstances. This rule applies only if there is no contract term. Agreement may be found in express language or in usage of trade or course of dealing. This section does not allow a court to add or alter agreed terms. See Section 210, Comment No. 4.

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

3. Lack of Contract. This section does not apply if the parties do not intend an agreement. If a term is left open because there was no agreement on the term and the intent of the parties precludes a contract unless or until that agreement occurs, Section 202(e) applies.

[SUBPART B. INTERPRETATION]

SECTION 307. INTERPRETATION AND REQUIREMENTS FOR GRANT.

(a) [Terms of grant.] A license grants:

(1) the contractual rights that are expressly described; and

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

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

(c) [Improvements not included.] A party is not entitled to any rights in new versions of, or improvements or modifications to, information made by the other party. A licensor's agreement to provide new versions, improvements, or modifications requires that the licensor provide them as developed and made generally commercially available from time to time by the licensor.

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

(e) [Other rules of interpretation.] Terms concerning scope must be construed under ordinary principles of contract interpretation in light of the informational rights and the commercial context. In addition, the following rules apply:

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

(2) [Grant of "exclusive license" interpreted.] A grant of an "exclusive license", or a grant in similar terms, means that:

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

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

(f) [When record required.] The rules in this section may be varied only by a record that is sufficient to indicate that a contract has been made and which is:

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

(2) prepared and delivered by one party and adopted by the other under Section 208 or 209.

Definitional Cross References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Copy"; "Delivery"; "Information"; "Informational rights"; "License"; "Licensee"; "Licensor"; "Party"; "Person"; "Receive"; "Record"; "Scope"; "Term".

Comment

1. Scope of Section. This section deals with interpretation of a license, establishing the basic premise that a license should be interpreted in a commercially reasonable manner and providing several specific interpretation rules that reflect commercial practice.

2. License Grant. Subsection (a) provides that as a matter of interpretation a license gives the contractual rights expressly granted and, in appropriate cases, limited implied rights to the extent necessary to use the expressly granted rights in the information. A license of software expressly allowing the licensee to create visual presentations for use in public speaking incorporates a right to publicly display images from the software in such presentations because that right is necessary to the expressly granted right. On the other hand, under both copyright law and this section, a contract granting a right to publish a work as part of a particular compilation does not convey any implied right to reproduce that work in another medium or form. See Tasini v. The New York Times Co., Inc., - U.S. - (2001). Also, the implied rights apply only to rights within the control of the licensor at the time of the contracting. For example, a license to use a photograph in a digital product implies a right to transform that photograph into digital form assuming that this right was within the licensor's control at the time the contract was made.

This subsection does not create an implied license, but merely states a reasonable commercial interpretation of a contract. It can be over-ridden by the agreement. Also, the implied rights pertain only to information and material provided to the licensee. They do not require that the licensor transfer additional materials (such as source code) unless that transfer was agreed by the parties. The rights must be necessary and not merely convenient to enable the express grant. They do not include rights merely because the licensee desired them, merely because the rights pertain to uses made possible by possession of a copy, or merely common or even helpful rights, unless such rights are necessary to utilize the expressly granted rights. Express terms creating greater rights or lesser rights, of course, override this subsection.

Subsection (a) expresses a contract law interpretive rule. Some cases hold that federal policy requires interpretation of a license against the licensee and in a manner that withholds any use not expressly granted. SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9th Cir. 1989). The better view is that expressed in cases such as Bourne v. Walt Disney Co., 68 F.3d 621 (2d Cir. 1995), which treat interpretation as an ordinary commercial contract question. Of course, to the extent a mandatory federal policy precludes different state law, that policy overrides subsection (a). Section 105(a).

3. Exceeding the Grant. Subsection (b) resolves the interpretation of a license that gives the licensee a right "to do X" when the licensee does an act that exceeds or differs from "X." When the contract limit is express, as in stating a right "only to do X", actions different from the expressly limited grant are a breach. This refers to the grant as interpreted, including consideration of course of dealing and usage of trade. When the license is less explicit, subsection (b) provides that there is an implied limitation that the licensee will not use the information other than as described in the contract and subsection (a). Uses outside these terms are a breach. This rejects case law that requires express limiting language for this result, such as requiring a license to state that the licensee may "only do X". If the word "only" or its equivalent does not appear, some patent cases hold that uses not covered by the grant infringe the patent, but may not breach the license. As a matter of contract law, a rule that hinges on the use or failure to use the word "only" provides a trap that is avoided in subsection (b) by adopting the ordinary understanding that an affirmative grant implicitly excludes uses that exceed or are not otherwise within the grant.

The implied limitation, however, does not yield a breach if the use would have been permitted by law in the absence of the limitation. Thus, scholarly use of a quotation from licensed material not subject to trade secrecy restraints, if a fair use under federal law, would not conflict with the implied limitation. However, a licensee that does something that is not included in that grant and that is not protected such as by fair use breaches the contract. A license for use in Peoria implies the lack of a right to do so in Detroit, just as a contractual right to use information for 100 users implies a lack of a right to use it for 101 or more.

4. Improvements and Design Material. Under subsections (c) and (d), unless the contract clearly indicates otherwise, neither party has a right to receive subsequent modifications or improvements made by the other, or a right of access to design and confidential material. Arrangements for such material as modifications, improvements, source code or designs entail separate relationships handled by express contract terms. In the absence of express terms, the contract gives no rights to such material to either party. This contract law principle does not, of course, supplant intellectual property rules on derivative works. Section 105(a).

5. Grant Clauses. Subsection (e) states that ordinary commercial contract principles apply to interpreting a license grant. As a state law rule, of course, it is subject to contrary federal policy which, some courts hold, requires interpretation of a grant in favor of the licensor. See Comment No. 2 above.

Subsections (e)(1) and (e)(2) provide guidance on important license terms. Subsection (e)(1) establishes a uniform rule on when a grant covers future technologies and rights. Use of statutory or similar language that creates a broad scope without qualification should be sufficient to cover any and all rights as well as present and future media (such as print, television, on-line and other modes of distribution). This is subject to other rules in this Act, including for example, the premise that the licensee does not receive any rights in enhancements made by the licensor unless the contract expressly so provides. The interpretation rule does not encourage or discourage use of such broad grants, but merely gives guidance on what language achieves what result when agreed by the parties.

Subsection (e)(2) clarifies that an exclusive license that does not otherwise deal with the issue, conveys exclusive rights that include restrictions on the licensor. The licensor may not license or itself use the information within the scope of the exclusive license, and affirms that it has not granted any other subsisting license covering the same scope and will not grant any future license covering the same scope that takes effect during the duration of the exclusive license. This Act does not change the definition of what is an "exclusive license" for copyright law recordation purposes, it merely deals with the interpretation given to a contract that provides that it is an exclusive license.

SECTION 308. AGREEMENT FOR PERFORMANCE TO PARTY'S SATISFACTION.

(a) [Reasonable person standard as general rule.] Except as otherwise provided in subsection (b), an agreement that provides that the performance of one party is to be to the satisfaction or approval of the other party requires performance sufficient to satisfy a reasonable person in the position of the party that must be satisfied.

(b) [When subjective satisfaction standard applies.] Performance must be to the subjective satisfaction of the other party if:

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

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

Uniform Law Source: Restatement § 228.

Definitional Cross References: Section 102: "Agreement"; "Contract"; "Informational content"; "Party"; "Person"; "Term".

Comment

1. Scope of Section. This section deals only with cases where the agreement provides that the acceptability of a required performance is to be judged based on the satisfaction of the party receiving the performance (e.g., where the parties agreed to a "to the satisfaction" clause). This often occurs in licenses where a work is to appeal to aesthetic sensibilities or taste.

2. Basic Rule. Subsection (a) follows the Restatement (Second) of Contracts § 228. Contract terms that define acceptability in terms of "to the satisfaction" of a party are ordinarily interpreted as requiring an objective or reasonable person standard. Refusal is not allowed if the tender would be acceptable to a reasonable person. This rule is supplemented by the general obligation of good faith that applies to all contracts.

3. Subjective Standard. As subsection (b) indicates, there are cases where a subjective standard of satisfaction is appropriate. The most obvious is when the contract so states. Subsection (b)(1) provides language that indicates a subjective satisfaction standard. Of course, the agreement may expressly reject a subjective standard and that agreement would control.

Subsection (b)(2) presumes a subjective standard if the contract involves informational content evaluated on aesthetics, appeal, or the like. See Locke v. Warner Brothers, Inc., 66 Cal. Rptr.2d 921 (Cal. App. 1997) (Under California law the applicable standard is that it is to be to the "honest satisfaction" of the party). As the subsection makes clear, this refers to cases where evaluation reflects subjective criteria and judgment. A reasonable person standard in such cases is nonsensical since the nature of the required evaluation presumes the exercise of personal judgment.

PART 4

SECTION 401. WARRANTY AND OBLIGATIONS CONCERNING NONINTERFERENCE AND NONINFRINGEMENT.

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

(b) [Warranty of noninterference and exclusivity.] A licensor warrants:

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

(2) as to rights granted exclusively to the licensee, that within the scope of the license:

(A) to the knowledge of the licensor, any licensed patent rights are valid and exclusive to the extent exclusivity and validity are recognized by the law under which the patent rights were created; and

(B) in all other cases, the licensed informational rights are valid and exclusive for the information as a whole to the extent exclusivity and validity are recognized by the law applicable to the licensed rights in a jurisdiction to which the license applies.

(c) [Exceptions and limitations.] The warranties in this section are subject to the following rules:

(1) [Governmental mandates.] If the licensed informational rights are subject to a right of privileged use, collective administration, or compulsory licensing, the warranty is not made with respect to those rights.

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

(3) [Patent licenses.] The warranties under subsections (a) and (b)(2) are not made by a license that merely permits use, or covenants not to claim infringement because of the use, of rights under a licensed patent.

(d) [Disclaimer or modification permitted.] Except as otherwise provided in subsection (e), a warranty under this section may be disclaimed or modified only by specific language or by circumstances that give the licensee reason to know that the licensor does not warrant that competing claims do not exist or that the licensor purports to grant only the rights it may have. An obligation to hold harmless under subsection (a) may be disclaimed or modified only by specific language or by circumstances giving the licensor reason to know that the licensee does not provide a hold-harmless obligation to the licensor. In an automated transaction, language is sufficient if it is conspicuous. Otherwise, language in a record is sufficient if it states:

(1) as to a licensor's obligation, "There is no warranty against interference with your enjoyment of the information or against infringement", or words of similar import; or

(2) as to a licensee's obligation, "There is no obligation to hold you harmless from any actions taken in compliance with the specifications or methods furnished by me under this contract", or words of similar import.

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

Uniform Law Source: Uniform Commercial Code: Sections 2A-211; 2-312 (1998 Official Text).

Definitional Cross References: Section 102: "Agreement"; "Automated transaction"; "Conspicuous"; "Contract"; "Information"; "Informational rights"; "Knowledge;" "License"; "Licensee"; "Licensor"; "Merchant"; "Notify," "Person"; "Record"; "Scope"; "Term," "Transfer." Section 117: "Reason to know".

Comment

1. Scope of the Section. This section deals with warranties on non-infringement, exclusivity, and non-interference. These warranties are not implied warranties and cannot be disclaimed except as stated in this section.

2. Non-Infringement Warranty. Subsection (a) derives from Uniform Commercial Code § 2-312 (1998 Official Text). Language changes, such as use of the word "will" as compared to "shall", are for purposes of style and no change in substance is intended.

a. Party Making the Warranty. When the computer information is part of the normal business subject matter with which the licensor deals and is provided in the normal course of its business, it is the licensor's obligation to see that no third party claim of infringement of an intellectual property right or of misappropriation will affect the delivered information. As in Article 2, however, a transfer by a person other than a dealer in information of the kind raises no implication of such a warranty.

b. Delivered Free of Infringement. Subsection (a) requires delivery free of rightful claim of infringement or misappropriation. The mere assertion of a claim does not breach this warranty; the claim must be valid. As in Uniform Commercial Code Section 2-312 (1998 Official Text), the warranty refers to circumstances and claims existing as the information exists at delivery. This does not cover future events, such as a subsequently issued patent, or extend to use of the information, such as infringement claims resulting from a licensee's decision to use multi-functional software in a manner that is an infringing use, or to combine the licensed information with other information where the composite infringes a third party right. Chemtron, Inc. v. Aqua Products, Inc., 830 F. Supp. 314 (E.D. Va. 1993) and Motorola v. Varo, Inc., 656 F.Supp. 716 (N.D. Tex. 1986) frame the issue correctly. For example, in a license of a spreadsheet program, the warranty is that the program itself does not infringe another person's rights, not that uses of the program that may involve employing the program's capability to create particular functions will not infringe the rights of another. See, e.g., Matthew Bender & Co., Inc.. v. West Pub. Co., 158 F.3d 693 (2d Cir. 1998) (no infringement even if program could be used to recreate copyrighted work). Under Section 805, the limitations period for breach begins when breach was or should have been discovered, rather than on tender of delivery of the information.

c. Patent License. Subsection (c)(3) makes the subsection (a) warranty inapplicable to patent licenses. This refers to a party licensing a patent per se. Most such patent licenses are not within this Act, but if the license is within this Act, subsection (c) adopts the prevailing rule in patent licensing: a patent license does not warrant that the licensee can use the licensed technology, but merely affirms that the licensor will not sue for use of its rights. On the other hand, if a party licenses computer information, the subsection (a) warranty is breached if the information as delivered infringes a third party patent. If a licensor gives a license to the patent itself, subsection (a) does not apply.

d. Specifications and Hold Harmless. No warranty from the licensor is implied when the licensee orders computer information to be assembled, prepared, designed or manufactured on the licensee's detailed specifications and methods; in such cases liability runs from the licensee to the licensor. There is an implicit representation by the licensee that the licensor will be safe in following the detailed specifications and method that the licensee requires. See Bonneau Co. v. AG Industries, inc., 116 F.3d 155 (5^th Cir. 1997) (rule under Article 2).

The circumstances for this rule do not arise merely because the licensee assists and advises in developing the computer information and even suggests alternative approaches to development. In such cases, the licensor remains in control. More generally, the licensee is entitled to rely on the technical expertise and judgments of the licensor. That is reversed only when the agreement makes clear that the licensee has undertaken to specify what must be done and how it must be done in detail sufficient to eliminate the licensor's choices. When this occurs, there is a tacit assurance from the licensee that there will be no infringement claim resulting from relying on that mandate. For this rule to apply, then, the specifications and method must be specific or detailed, rather than general, and compliance must be required by contract. The "hold harmless" obligation does not exist if infringement is caused by or arises out of optional choices of the licensor that may result in infringement.

A licensor presented with required specifications and methods has an obligation to adopt, or notify the licensee of, non-infringing alternatives of which it has reason to know. The "hold harmless" obligation is eliminated if the licensor had reason to know of a non-infringing alternative and failed either to choose it or notify the licensee of it, such as when an experienced designer of banking systems knows that alteration of a specification would allow use of an alternative that will avoid infringement of a financial systems patent. Only a non-infringing alternative of which the licensor has reason to know is required; the section does not impose a duty of investigation. Reason to know for this purpose must exist at the time that the contract is performed. Since we are dealing with contractually required performance, however, it is enough that the licensee be notified of the non-infringing alternative--the licensor cannot unilaterally rewrite or ignore the contractual requirements.

e. Non-Infringement and Passive Transmission. The warranty in subsection (a) is only made by licensors of information. It does not apply to persons who provide communications or transmission services even if such service falls within this Act. Those service providers do not, for purpose of contract law, engage in activities that reasonably create the inference that they assure the absence of infringing information. That obligation could be expressly undertaken by the contract but is not created by this Act. This Act takes no position and has no effect on what constitutes copyright infringement in such situations. Whether a party is a licensor of information for contract law depends on its position with respect to affirmatively providing the information as part of its ordinary business. This has no bearing on whether a passive transmission provider is liable for infringement to the owner of intellectual property rights.

3. Interference Warranty. The warranty of quiet possession was abolished in Uniform Commercial Code Article 2 for sales of goods but reestablished in Uniform Commercial Code Article 2A for leases of goods. Paragraph (b)(1) follows Article 2A. It creates a warranty that no act or omission of the licensor will result in a third party holding a claim (other than infringement) that interferes with enjoyment by the licensee of its contractual interest. "Enjoyment" refers to authorized exercise of contract rights in use of the information. The warranty is limited to interfering claims or interests that arise from the licensor's acts or omissions. As in Article 2A, this limitation enables the licensor to assess risks. Infringement and misappropriation claims are excluded because they are dealt with in subsection (a). The warranty reflects that the nature of a license results in a need of the licensee for protection greater than that afforded to a buyer of goods. The warranty represents a tacit commitment by the licensor that it will not act during the duration of the contract in a manner that detracts from the contractual grant. Under Section 805, the limitations period for breach begins when delivery of the information is tendered, not when breach was or should have been discovered. This follows U.C.C. Article 2-312 (1998 Official Text, Comment 2) (breach of warranty of good title occurs when tender of delivery is made since the warranty is not one which extends to future performance).

4. Exclusivity. Subsection (b)(2) deals with exclusive licenses. When a license purports to be exclusive, it engenders two implied assurances that are not relevant for non-exclusive licenses. The first concerns the validity of the intellectual property rights. An exclusive licensor warrants that the rights conveyed are not in the public domain. If this condition is not met, the licensor cannot convey exclusive rights. The second involves whether a portion of the rights covered by the license are vested in another person because co-authors or co inventors were involved, or a prior license exists. In an exclusive license, the licensor implicitly warrants that this is not true. The reasoning on both points is similar: if the implied circumstances are not present, the meaning of "exclusivity" is altered. A similar concern does not exist for non-exclusive licenses because such a condition does not alter the licensee's ability to use the licensed rights as described.

A special rule governs patents. When the exclusivity warranty applies at all, it is restricted to the licensor's knowledge. The warranty is inapplicable to patent licenses excluded under subsection (c)(3).

Exclusivity and validity are warranted only to the extent recognized in law applicable to the rights in question. Thus, the licensor of a trade secret warrants that it has not granted rights to another person, but does not warrant that no other person independently has the information. A trade secret gives no rights against independent discovery. If no right of publicity is recognized in a particular jurisdiction, then the licensor does not warrant exclusivity there with respect to such rights. Subsection (c)(1) reinforces this theme. If under applicable law, the rights are subject to compulsory licensing, public access or use, the warranty is limited by the terms of those rights. For example, a licensor of rights in information which must be licensed to any and all parties for a specified fee, does not warrant exclusivity. If an exclusive right is limited in law by a privilege granted to public use, such as "fair use," the licensor does not warrant against such use.

5. International Issues. Intellectual property rights extend only within the territory of the jurisdiction that creates them, although some deference internationally occurs through multi-lateral treaties. Subsection (c)(2) provides that implied exclusivity and infringement warranties extend only within this country and a country specifically mentioned in the warranty. This latter extension refers to statements made with express reference to the warranty, such as "Licensor warrants non-infringement worldwide." Other references in a license may not be intended to create a warranty. A grant of a license for worldwide use may be no more than a permission to use the information worldwide without lawsuit by the licensor, rather than a warranty that worldwide use will not infringe others rights. In the case of a "worldwide warranty," the obligation extends only to countries that have intellectual property rights treaties with the United States. In the absence of such relationships, rights created under United States law cannot create rights in the other country and, thus, it is assumed that the parties did not intend it to extend there.

6. Disclaimer. Subsection (d) derives from U.C.C. § 2-312 (1998 Official Text) and goes further to provide illustrative language for disclaimer of the licensee's hold harmless obligation. The infringement and other warranties in this section are not implied warranties and cannot be disclaimed except as provided in this Section. Under subsection (d), this requires specific language or circumstances indicating that the warranties are not given; illustrative language is provided for clarity. Subsection (d) limits the conditions under which the warranty can be disclaimed or modified; it does not limit or preclude disclaimer or modification of a hold harmless obligation that might arise under subsection (a).

Subsection (e) recognizes an alternative form of disclaimer in commercial cases. Reference to a grant of a "quitclaim" in this context is relatively common is some areas of business and indicates that the licensor is not undertaking any assurance about the nature or scope of the rights it holds or conveys.

SECTION 402. EXPRESS WARRANTY.

(a) [How created.] Except as otherwise provided in subsection (c), an express warranty by a licensor is created as follows:

(1) [Affirmation of fact or promise.] An affirmation of fact or promise made by the licensor to its licensee, including by advertising, which relates to the information and becomes part of the basis of the bargain creates an express warranty that the information to be furnished under the agreement will conform to the affirmation or promise.

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

(3) [Sample, model, or demonstration.] Any sample, model, or demonstration of a final product which is made part of the basis of the bargain creates an express warranty that the performance of the information will conform to the performance of the sample, model, or demonstration, taking into account differences that would appear to a reasonable person in the position of the licensee between the sample, model, or demonstration and the information as it will be used.

(b) [Puffing and language limitations.] It is not necessary to the creation of an express warranty that the licensor use formal words, such as "warranty" or "guaranty", or state a specific intention to make a warranty. However, an express warranty is not created by:

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

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

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

(c) [Law applicable to published informational content.] An express warranty or similar express contractual obligation, if any, exists with respect to published informational content covered by this [Act] to the same extent that it would exist if the published informational content had been published in a form that placed it outside this [Act]. However, if the warranty or similar express contractual obligation is breached, the remedies of the aggrieved party are those under this [Act] and the agreement.

Uniform Law Source: Uniform Commercial Code: Section 2A-210; 2-313 (1998 Official Text).

Definitional Cross References: Section 102: "Aggrieved party"; "Agreement"; "Information"; "Informational content"; "Licensee"; "Licensor"; "Party"; "Person;" "Published informational content".

Comment

1. Scope and Basis of Section. This section follows Article 2 of the Uniform Commercial Code (1998 Official Text), except with respect to published informational content, where it preserves current common law. "Express" warranties rest on "dickered" aspects of the individual bargain and go to the essence of that bargain. "Implied" warranties, on the other hand, rest on inferences from a common factual situation or set of conditions so that no particular language is necessary to create them. They exist unless disclaimed.

2. Basis of the Bargain. Subsection (a) generally adopts the "basis of the bargain" test from U.C.C. §§ 2-313; 2A-210 (1998 Official Text). This allows courts and parties to draw on extensive case law distinguishing express warranties from puffing and from other unenforceable statements, representations or promises. The concept of the "basis of the bargain" standard is that express affirmations or promises are express warranties if they are within the matrix of elements that constitute the bargain of the parties, but that they are not express warranties if they are not part of the basis for the contract. This does not require that a licensee prove actual reliance on a specific statement in deciding to enter into the contract, but does require proof that the statement played a role in the bargain. The issue is whether statements of the licensor to the licensee have in the circumstances and in objective judgment become part of the basic deal. However, an express warranty concerns a bargain; this does not convert all statements a licensor makes about information into an express warranty.

As in Article 2 of the Uniform Commercial Code (1998 Official Text), no specific intent to make a warranty is necessary if the indicated representations, promises or affirmations are part of the basis of the bargain. In practice, affirmations of fact describing the information and made by the licensor about it during the bargaining are ordinarily part of the bargain unless they are mere puffing, predictions, or otherwise not an enforceable commitment. No specific reliance on the specific statement need be shown in order to weave it into the fabric of the agreement. Of course, when statements are made by an agent, the effect of the representations to bind the principal are governed by ordinary standards about the scope and effect of agency.

If language is used after the closing of the deal (as when the licensee on taking delivery asks for and receives an additional assurance), the assurance may become a modification of the contract. An agreed modification requires no consideration to be binding. Section 303. Alternatively, under the layered contracting recognized in Section 208 and 209, in appropriate cases the assurance may be a further elaboration of terms of the contract if the parties, at the outset, had reason to know this would occur.

3. Advertising as an Express Warranty. Paragraph (a)(1) expands current Article 2. It clarifies that advertising by the licensor may create an express warranty if it otherwise meets the standards for an express warranty under this section. A warranty exists only if the advertising statement becomes part of the bargain and a bargain between the person making the statement and the person acquiring the product actually occurs. Under this Act, and particularly Section 613, a contract may exist between the end user and a dealer who makes the statement, or, or as well as, separately between the end user and a publisher who makes the statement; neither is responsible for the other's statement, however. The affirmation of fact in advertising must be known by the licensee, and must influence and in fact become part of the basis of the bargain between the licensee and warrantor and under which the licensee acquired the computer information. If this does not occur, there is no express warranty. Also, statements made in advertising that are puffing or mere expressions of opinion do not create an express warranty. In appropriate cases, there may be liability for false advertising, but that does not arise under contract law. This section does not create a false advertising claim under the guise of contract law.

4. Descriptions. Paragraph (a)(2) is a specific application of when a description becomes an express warranty. The description need not be by words. Technical specifications, blueprints and the like can afford more exact descriptions than mere language and, if made part of the basis of the bargain, become express warranties. Of course, all descriptions by merchants must be read in light of applicable trade usage and in light of concepts about merchantability that may resolve any doubts about the meaning of the description. The description requires a commercially reasonable interpretation.

5. Samples and Models. Samples, models and demonstrations are treated no differently than statements. However, in mercantile experience, the mere exhibition of a "sample", a "model" or a "demonstration" does not of itself show whether it is intended to "suggest" or to "be" the character of the subject-matter of the contract. That distinction is recognized in reported cases and in this Act.

The effect of 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. Showing a sample of a keg of raw beans consisting of a cup-full of beans communicates one inference (most beans will be similar), while 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 inference is not that actual use will be identical to use of the sample). This difference also applies to beta models of software, which are used on a test or a demonstration basis and may contain elements that are not carried forward into the ultimate product. Ordinarily the parties understand that what is being demonstrated on a small scale or tested on a beta model is not necessarily representative of actual performance or of the eventual product. As with any other purported express warranty, any model