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CARLYLE C. RING, JR., 1401 H. Street, N.W., Suite 500, Washington, DC 20005, Chair
JOHN A. CHANIN, 1020 Aoloa Place, Suite 206B, Kailua, HI 96734
STEPHEN Y. CHOW, One Beacon Street, 30th Floor, Boston, MA 02108
PATRICIA BRUMFIELD FRY, University of North Dakota, School of Law, P.O. Box 9003,
Grand Forks, ND 58201
THOMAS T. GRIMSHAW, Suite 3800, 1700 Lincoln Street, Denver, CO 80203
LEON M. McCORKLE, JR., P.O. Box 387, Dublin, OH 43017-0387
THOMAS J. McCRACKEN, JR., Room 600, 134 N. LaSalle Street, Chicago, IL 60602
JAMES C. McKAY, JR., Office of Corporation Counsel, 6th Floor South, 441 4th Street, N.W.,
Washington, DC 20001
BRUCE MUNSON, Revisor of Statutes Bureau, Suite 800, 131 W. Wilson Street, Madison, WI 53703
LEWIS BART STONE, 52nd Floor, 200 Park Avenue, New York, NY 10166
RAYMOND T. NIMMER, University of Houston, Law Center, 4800 Calhoun, Houston, TX 77204,
Reporter
GENE N. LEBRUN, P.O. Box 8250, 9th Floor, 909 St. Joseph Street, Rapid City, SD 57709, President
BARRY H. EVENCHICK, 8th Floor, One Gateway Center, Newark, NJ 07102, Division Chair
DONALD A. COHN, 14 Gale Lane, Greenville, DE 19807, Co-Advisor
DANIEL S. COOLIDGE, 1000 Elm Street, Box 3701, Manchester, NH 03105, Law Practice
Management Section Advisor
MARY JO HOWARD DIVELY, One Oxford Centre, 40th Floor, Pittsburgh, PA 15219, Business Law
Section Advisor
GEORGE L. GRAFF, 30th Floor, 399 Park Avenue, New York, NY 10022, Co-Advisor
LYNN P. HENDRIX, 1700 Lincoln Street, Suite 4100, Denver, CO 80203, Intellectual Property Law
Section Advisor
FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman,
OK 73019, Executive Director
WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus
SECTION 101. SHORT TITLE 14
SECTION 102. DEFINITIONS 14
SECTION 103. SCOPE; EXCLUSIONS; AGREEMENT THAT ACT GOVERNS 49
SECTION 104. SUPPLEMENTAL PRINCIPLES: COMMERCIAL PRACTICE; VARIATION
BY AGREEMENT; GOOD FAITH; DECISION FOR COURT 59
SECTION 105. RELATION TO FEDERAL LAW; TRANSACTIONS SUBJECT TO OTHER
STATE LAW 63
SECTION 106. RULES OF CONSTRUCTION 71
SECTION 107. LEGAL RECOGNITION OF ELECTRONIC RECORD AND
AUTHENTICATION; USE OF ELECTRONIC AGENTS 73
SECTION 108. PROOF AND EFFECT OF AUTHENTICATION 74
SECTION 109. CHOICE OF LAW 75
SECTION 110. CONTRACTUAL CHOICE OF FORUM 79
SECTION 111. UNCONSCIONABLE CONTRACT OR TERM 81
SECTION 112. MANIFESTING ASSENT; OPPORTUNITY TO REVIEW 83
SECTION 201. FORMAL REQUIREMENTS 92
SECTION 202. FORMATION IN GENERAL 97
SECTION 203. OFFER AND ACCEPTANCE IN GENERAL 100
SECTION 204. ACCEPTANCE WITH VARYING TERMS 102
SECTION 205. CONDITIONAL OFFER OR ACCEPTANCE 105
SECTION 206. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS 107
SECTION 207. FIRM OFFERS 110
SECTION 208. FORMATION: RELEASES OF INFORMATIONAL RIGHTS 110
SECTION 209. FORMATION: SUBMISSION OF INFORMATION 112
SECTION 210. ADOPTING TERMS OF RECORDS 114
SECTION 211. MASS-MARKET LICENSE 119
SECTION 212. TERMS OF CONTRACT FORMED BY CONDUCT 125
SECTION 213. PRETRANSACTION DISCLOSURES IN INTERNET TRANSACTIONS 127
SECTION 214. COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE 129
SECTION 215. DETERMINING ATTRIBUTION OF ELECTRONIC EVENT TO PERSON;
RELIANCE LOSSES 131
SECTION 216. ATTRIBUTION PROCEDURE FOR DETECTION OF CHANGES AND
ERRORS: EFFECT OF USE 135
SECTION 217. ELECTRONIC ERROR: CONSUMER DEFENSES 137
SECTION 218. ELECTRONIC MESSAGE: WHEN EFFECTIVE; EFFECT OF
ACKNOWLEDGING 140
SECTION 301. PAROL OR EXTRINSIC EVIDENCE 142
SECTION 302. PRACTICAL CONSTRUCTION 144
SECTION 303. MODIFICATION AND RESCISSION 146
SECTION 304. CONTINUING CONTRACTUAL TERMS 149
SECTION 305. TERMS TO BE SPECIFIED 152
SECTION 306. PERFORMANCE UNDER OPEN TERMS 154
SECTION 307. INTERPRETATION AND REQUIREMENTS FOR GRANT 155
SECTION 308. DURATION OF CONTRACT 160
SECTION 309. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING 164
SECTION 310. DELIVERY TERMS 166
SECTION 311. AGREEMENT FOR PERFORMANCE TO PARTY'S SATISFACTION 167
SECTION 401. WARRANTY AND OBLIGATIONS CONCERNING QUIET ENJOYMENT
AND NONINFRINGEMENT 169
SECTION 402. EXPRESS WARRANTY 175
SECTION 403. IMPLIED WARRANTY: MERCHANTABILITY OF COMPUTER PROGRAM 181
SECTION 404. IMPLIED WARRANTY: INFORMATIONAL CONTENT 185
SECTION 405. IMPLIED WARRANTY: LICENSEE'S PURPOSE; SYSTEM INTEGRATION 189
SECTION 406. DISCLAIMER OR MODIFICATION OF WARRANTY 192
SECTION 407. MODIFICATION OF COMPUTER PROGRAM 199
SECTION 408. CUMULATION AND CONFLICT OF WARRANTIES 200
SECTION 409. THIRD-PARTY BENEFICIARIES OF WARRANTY 200
SECTION 501. OWNERSHIP OF INFORMATIONAL RIGHTS 204
SECTION 502. TITLE TO COPY 205
SECTION 503. TRANSFER OF CONTRACTUAL INTEREST 207
SECTION 504. EFFECT OF TRANSFER OF CONTRACTUAL RIGHTS 212
SECTION 505. PERFORMANCE BY A DELEGATE; SUBCONTRACT 213
SECTION 506. TRANSFER BY LICENSEE 215
SECTION 507. FINANCING WHERE FINANCIER DOES NOT BECOME LICENSEE 216
SECTION 508. FINANCE LICENSES 217
SECTION 509. FINANCING ARRANGEMENTS: OBLIGATIONS IRREVOCABLE 220
SECTION 510. FINANCING ARRANGEMENTS: REMEDIES OR ENFORCEMENT 221
SECTION 511. FINANCING ARRANGEMENTS: MISCELLANEOUS RULES 224
SECTION 601. PERFORMANCE OF CONTRACT IN GENERAL 225
SECTION 602. LICENSOR'S OBLIGATIONS TO ENABLE USE 228
SECTION 603. SUBMISSIONS OF INFORMATION TO SATISFACTION OF PARTY 229
SECTION 604. IMMEDIATELY COMPLETED PERFORMANCE 231
SECTION 605. ELECTRONIC REGULATION OF PERFORMANCE 232
SECTION 606. COPY: DELIVERY; TENDER OF DELIVERY 236
SECTION 607. COPY: PERFORMANCE RELATED TO DELIVERY; PAYMENT 238
SECTION 608. COPY: RIGHT TO INSPECT; PAYMENT BEFORE INSPECTION 239
SECTION 609. COPY: WHEN ACCEPTANCE OCCURS 242
SECTION 610. COPY: EFFECT OF ACCEPTANCE 244
SECTION 611. ACCESS CONTRACTS 246
SECTION 612. CORRECTION AND SUPPORT AGREEMENTS 249
SECTION 613. CONTRACTS INVOLVING PUBLISHERS, DEALERS, AND END USERS 251
SECTION 614. RISK OF LOSS OF COPY 254
SECTION 615. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS 257
SECTION 616. TERMINATION; SURVIVAL OF OBLIGATIONS 260
SECTION 617. NOTICE OF TERMINATION 262
SECTION 618. TERMINATION: ENFORCEMENT 264
SECTION 701. BREACH OF CONTRACT; MATERIAL BREACH 266
SECTION 702. WAIVER OF REMEDY FOR BREACH OF CONTRACT 269
SECTION 703. CURE OF BREACH OF CONTRACT 272
SECTION 704. COPY: REFUSAL OF DEFECTIVE TENDER 276
SECTION 705. COPY: INSTALLMENT CONTRACTS; REFUSAL AND DEFAULT 278
SECTION 706. COPY: CONTRACT WITH PREVIOUS VESTED GRANT OF RIGHTS 279
SECTION 707. COPY: DUTIES UPON RIGHTFUL REFUSAL 281
SECTION 708. COPY: REVOCATION OF ACCEPTANCE 284
SECTION 709. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE 287
SECTION 710. ANTICIPATORY REPUDIATION 288
SECTION 711. RETRACTION OF ANTICIPATORY REPUDIATION 288
SECTION 801. REMEDIES IN GENERAL 290
SECTION 802. CANCELLATION 291
SECTION 803. CONTRACTUAL MODIFICATION OF REMEDY 295
SECTION 804. LIQUIDATION OF DAMAGES 300
SECTION 805. STATUTE OF LIMITATIONS 302
SECTION 806. REMEDIES FOR FRAUD 305
SECTION 807. MEASUREMENT OF DAMAGES IN GENERAL 305
SECTION 808. LICENSOR'S DAMAGES 309
SECTION 809. LICENSEE'S DAMAGES 315
SECTION 810. RECOUPMENT 319
SECTION 811. SPECIFIC PERFORMANCE 321
SECTION 812. LICENSOR'S RIGHT TO COMPLETE 323
SECTION 813. LICENSEE'S RIGHT TO CONTINUE USE 324
SECTION 814. RIGHT TO DISCONTINUE ACCESS 325
SECTION 815. RIGHT TO POSSESSION AND TO PREVENT USE 326
SECTION 816. ELECTRONIC SELF-HELP 329
SECTION 901. EFFECTIVE DATE 335
SECTION 902. TRANSACTIONS COVERED 335
The Uniform Computer Information Transactions Act (UCITA) is a contract law statute. It applies to "computer information transactions" as defined in Section 102, including commercial agreements to create, modify, transfer or distribute:
• computer software
• multimedia interactive products
• computer data and databases
• Internet and online information
UCITA thus applies to many of the most significant transactions in the information age that are for the most part intangibles and currently subject to diverse common law and miscellaneous state statutes.
The computer information and Internet industries comprise a large and fast growing part of the U.S. Yet, prior to this Act, transactions in these industries were governed by a complex, conflicting and uncertain body of case and statutory law not developed with reference to the challenges that computer information transactions present.
The purposes of this Act are to:
• support and facilitate the realization of the full potential of computer information transactions in cyberspace;
• clarify the law governing computer information transactions;
• enable expanding commercial practice in computer information transactions by commercial usage and agreement of the parties; and
• make the law uniform among the various jurisdictions.
UCITA marks an important turning point in the fastest growing part of the United States economy, providing a coherent and balanced legal basis for the transactions that shape computer-information industries. This is a cyberspace commercial statute. The goal of a commercial contract statute is not to redistribute wealth, but to provide a firm basis for marketplace transactions. UCITA sets out a variety of default rules relating to contract, which rules apply in the event that the parties agreement and surrounding trade practices do not provide terms on the particular issue. In this, UCITA is a balanced treatment of contract law that draws on common law, Article 2, and commercial practice. It is one of the most important proposed uniform laws considered by the NCCUSL, with the potential of establishing a uniform law for myriad computer-information-related transactions in the information age.
Computer information technologies have created a rapidly expanding, multifaceted industry. That industry already exceeds goods manufacturing sectors in the United States economy. Along with the services sector of the economy, it is growing rapidly while various fields of goods manufacturing stagnate or recede. UCITA sets out a contract base for computer information transactions that explicitly recognizes the importance of the unique modes of contracting and doing business in this industry; it adapts general contract law principles in a particularized manner to commercial transactions engaged in computer information. In this, it plays the same role for computer information transactions as original Article 2 of the Uniform Commercial Code played for sales of merchantile goods.
Sixty years ago, Karl Llewellyn argued that it was important to develop a contract law framework for commercial sales of manufactured goods that departed from law applicable to commerce in horses and similar chattels which shaped prior law. The rules for the one (horses) did not adequately apply to the other (manufactured goods).(1) While insightful judges might be able to surmount the difference, Llewellyn argued, some might not and, in any event, use of a wrong paradigm (horses) yielded uncertainty, complexity and risk of error when applied to merchantile goods. Llewellyn's insight was initially resisted. Over decades of vitriolic debate, however, his insight eventually won out, resulting in Article 2 of the Uniform Commercial Code. Article 2 emanated from the change in our economy from an agrarian commerce to an industrial commercial society and a desire to tailor commercial contract rules to that new type of commerce. Llewellyn's era was marked by controversy and a desire by many to reject the idea that changes in commerce were relevant to contract law. Then, the common "sense" was that decades-old rules derived on one focus could be adequately manipulated in court to fit modern commerce. That common "sense" was wrong.
The economy has changed again. Goods-based transactions remain important, but transactions in intangibles of computer information are a central element of commerce. UCITA embraces a judgment that Llewellyn would have understood: changes fundamental to the type of transactions in an economy require newly tailored commercial contract rules to fit computer information commerce.(2) Neither the subject matter nor the type of transactions in computer information are similar to sales or leases of goods. The law of toasters, televisions and chain saws is not appropriate for contracts involving on-line databases, artificial intelligence systems, software, multimedia, and Internet trade in information.
Transactions in computer information are governed today by a complex, often inconsistent or uncertain blend of different aspects of state common law, rules of federal common law, and by various statutes, most of which were designed for other subject matter, such as Article 2 which focuses on sales of goods, rather than licenses of computer information. This mismatch of legal rules and the uncertainty of outcome adds complexity and cost to transactions. A recent study in the European Union found that huge expenditures were made for the legal costs associated with uncertainty of transactional and other law in Internet transactions alone. Given that the United States is the world leader on commercializing information resources, the costs are commensurately far greater here. The UCITA framework establishes a uniform approach to basic transactional issues that can yield important structure and cost savings facilitating commerce. UCITA flows from the considered judgment of a NCCUSL Drafting Committee made after having worked on the topic over a period of four years and in more than twenty-five meetings attended by hundreds of lawyers and non-lawyers.
Because it touches on matters central to the new world economy and issues not previously a subject of uniform law, aspects of UCITA have been controversial. The controversies have never focused on more than a small portion of the Act. Many resulted in compromise solutions. Others reflect a misunderstanding of UCITA and how it corresponds to other uniform laws adopted by NCCUSL and by the States. These raise a continuing need to communicate accurate information about the Act. Some others result from conflicting fundamental policy views. There are many who have argued for a regulatory approach to transactions in this industry that would differ from the contract law approach applied to any other field of commerce. UCITA adheres to the norm of United States commercial law: freedom of contract is the philosophy of commerce. UCITA leaves in place basic consumer protection laws and adds several new consumer and licensee protections that extend beyond current law. However, the principle remains that markets and agreements control subject to unconscionability, fundamental public policy, and supplemental principles.
A drastic change in sources of value and value production in our economy beginning in the 1980's resulted in a new world economy in which the services and information sectors are commercially dominant.(3) The computer information sector exceeds most manufacturing sectors in size. The computer software and on-line industries provide the basic fuel for the information age, but did not exist in the 1950's when Article 2 was developed. Today, information products increasingly dominate the economy.
Contracts for computer information are not equivalent to transactions in goods, whether the issues focus on development, commercial exchange, or mass-marketing. Computer information contracts emphasize different issues and bring into play a different policy structure on issues ranging from allocation of liability risk to questions about how the right to use the informational subject matter is determined. One (goods) focuses on rights to a tangible item, while the other (computer information) focuses on intangibles and rights in intangibles. The contexts entail different contractual, transaction, property, and underlying social policies issues.
Software, multimedia, digital databases, artificial intelligence systems, and other computer information products are governed by an intellectual property law dominated by copyright law. A copyright owner has the exclusive right to reproduce and distribute copies of a work, engage in public display or performances of the work, and modify the work. This intellectual property law is much different from property law for goods. In law, software and most other digital products are treated more like books, than like cars. A purchaser that acquires a copy of computer information remains subject to the fact that the copyright holder retains control over most uses of the copy of information, unless it licenses or sells some or all of its rights.
Because the transactions focus on computer information, important transactional issues commonly exist in reference to what rights to use are to be conveyed. These issues are not present when goods are sold. In a sale of goods, the buyer owns the subject matter (e.g., the toaster); ownership creates exclusive rights in the item purchased. In contrast, when the subject matter is computer information, a person who acquires a copy may own the diskette, but does not own the information or rights associated with it. Instead, the person's rights to use the information depend on contract terms and intellectual property rights. Terms of the agreement determine what the purchaser obtains beyond the diskette.
Transactions in computer information also differ in significant aspect from other more traditional transactions in other information. The nature of the information differs. Computer information is shaped by its technology. It is more susceptible to alteration and to perfect copying than is information in any other form, such as print books or magazines. To use computer information, one must copy it (into a machine and within the machine). See Stenograph v. Bossard, 46 U.S.P.Q.2d 1936 (D.C. Cir. 1998); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). That is not true with print information. This creates copyright law issues with which this Act does not deal, but also creates contract issues which are addressed. Similarly, while you might make a copy of a paperback article, the copy would be different from the original. In computer information, copies are identical to the first copy.
The underlying property law and the ease of copying cause sharp differences in contracting practices between the computer information and the goods worlds. The differences are enhanced by Internet and online services. Indeed, in the modern market, while many users own machines that contain all the information resources they need, many systems use communications capabilities to allow a licensee to use software located thousands of miles away in "cyberspace."
Five themes frame many of the terms of UCITA. These are:
(1) the paradigm transaction is a license of computer information, rather than a sale of goods;
(2) innovation and competitiveness have come from small entrepreneurial companies as well larger companies;
(3) computer information transactions engage fundamental free speech issues;
(4) a commercial law statute should support contract freedom and interpretation of agreements in light of the practical commercial context; and
(5) a substantive framework for Internet contracting is needed to facilitate commerce in computer information.
Licenses of Information
The paradigmatic transaction is a license of computer information, rather than a sale of goods.
A license is characterized by (1) the conditional nature of the rights or privileges conveyed to use the information, and (2) the focus on computer information, rather than on goods. A license differs from a sale or lease of goods in many ways, including in what the transferee receives by contract. One court stated: "[A] patent license agreement is . . . nothing more than a promise by the licensor not to sue the licensee [even] if couched in terms of "[L]icensee is given the right to make, use, or sell X""(4) Images of a transaction that conveys ownership are not germane to licensing.
Licenses are commercial transactions in which contract terms define the product in ways that transcend contract terms in sales of goods. A sale of a car is a sale of a car. A license of a copy of software has different value if it grants a right to reproduce 100,000 copies or if it grants only a right to use a single copy. Yet, the copy of the computer information may be identical in both cases
Subject to limited public policy restraints, license restrictions are routinely enforceable. Among other issues, courts have enforced license restrictions that:
• preclude commercial use of a database
• limit a right to access
• limit use to a specific computer
• limit use to internal operations of the licensee
• prevent distribution of copies for a fee
• require distribution in a defined package of software and hardware
• preclude modification of the computer information
Contract law for licensing computer information and the fact of its interaction with intellectual property has existed for generations. UCITA provides a coherent framework for contracting in this field.
Many licenses deal with intellectual property, but others are not based on intellectual property law. Licenses in Internet or for on-line services often grant a party permission to enter the electronic site and obtain information from the computer of the other party.(5) That licensing does not depend on copyright or other intellectual property, but is important in the computer information world. UCITA describes this type of contract as an "access contract."
Small Businesses
Computer information transactions span a wide range of commercial practice. However, to an extent far greater than in goods manufacturing, the computer information industry is characterized by small companies (average size is less than twelve employees). This reflects the relatively small overhead and capital needs. The technology enables the creation and dissemination of computer information products without large capital investment.
While there are many large and very significant software and database companies, the majority are small. A one or two person firm can engage in the development of computer information products that have significant commercial value. Transactions in which such a company agrees to develop software for Disney Corporation, Citibank, or General Motors are common. The ability of small entities to engage in significant information commerce has geometrically expanded with the advent of the Internet.
Given this distribution of industry participants, the traditional image in the merchantile goods world of a large manufacturer dealing with small purchasers is often inverted in computer information transactions. This, of course, does not mean that economic leverage is balanced in all transactions, but simply that the direction of imbalance differs depending on the particular make-up of the particular transaction. Thus UCITA has been framed not only for transactions by large licensors dealing with small licensees, but also maintaining the viability of small innovative licensors who often deal with large licensees.
Similarly, most computer information providers are both licensors and licensees in commercial practice. This is true because, for most computer information products, the product source involves combinations of information from numerous sources, obtained through licenses or similar transactions.
Information and First Amendment
Although computer information is a central feature of commerce in this economy, it is still information and calls into play the panoply of important social issues associated with information and its dissemination in our society. This has been reaffirmed in many settings by courts dealing with computer information liability and regulation issues. The most recent was in 1999 when the Ninth Circuit Court of Appeals invalidated a federal export regulation on export of software encryption technology because the regulation infringed First Amendment values associated with the encryption source code.(6)
A major goal in UCITA is to foster, rather than inhibit the expansion of distribution of computer information and to recognize the social values associated with it. The convergence of technology and the evolution of the information age reflects a fundamental shift in our society and in how people interact, trade and establish commercial relationships. "Informational content," which consists of sights, sounds, text, and images that are communicated to people, is important commercially. That does not diminish its political or social role.
First Amendment and related policies remain central. What law does here affects not only the commercialization of information, but also the social values its distribution has always had in society. Informational content does not become something entirely different if the provider or author distributes it commercially, can hardly be a premise. Commercialization is not inconsistent with the role of information in political, social and other venues. These underlying values argue strongly for an approach to contract law in this field that does not encumber, but supports incentives for distribution of information and its distribution.
This theme permeates the provisions of UCITA. However, it emerges most clearly in several provisions unique to this Act and which represent one of its most significant contributions to modern contract law. These include:
• Section 105 establishes a right of a court to invalidate a contract term that conflicts with fundamental public policy relating to information
• Section 404 recognizes an implied obligation of data accuracy, but excludes from that implied warranty published informational content(7)
• Section 409 adopts the Restatement principle of third party liability and narrows that liability exposure for informational content
• Section 807 disallows consequential damages for the content of published informational content unless that exposure was expressly agreed to by the parties
One aspect of these issues involves the relationship between contract and intellectual property law. For many years, owners of intellectual property have contracted for selective distribution of their property and limited contracted-for use. Contract law enforces contract choices, subject to specific preemptive restrictions in federal property law, antitrust, consumer, or misuse law. In most cases, patent and copyright law coexist with state contract law. Yet, there are important issues here.
Digital technology and distribution systems change how and where information is made available and what rights or protections are appropriate for the new methods of distribution. The changes have led to a wide-ranging property law debate that ultimately goes to very fundamental social policy issues about the use and distribution of information. That debate has been argued in international treaty negotiations and in Congress. The issues cannot and should not be resolved as a matter of state contract law. UCITA adopts a neutral position with respect to what, ultimately, are issues of federal and international policy. However, UCITA provides a basis for case-by-case resolution of the myriad issues in Section 105(b). UCITA does not change the law on the enforceability of any restrictive clause that entails copyright misuse or that offends fundamental First Amendment concerns. The expectation is that, as they do today, courts will reject abusive clauses when they encounter them by applying existing doctrines that preserve the role of information in society.
Federal intellectual property law also places some specific limits on contract. These include restrictions on transferability, some recording requirements, a statute of frauds, and a rule that enforces property rights against good faith purchasers.(8) Federal law precludes any transfer of a licensee's rights in a non-exclusive license without the licensor's consent.(9) This interaction of state law and federal law yields default rules that, in some cases, do not correspond to the treatment of analogous issues in the UCC. These provisions reflect a policy of correspondence of rules in addition to simple recognition that federal law preempts contrary state law.
Freedom of Contract
UCITA supports the basic policy of freedom of contract. This Act is a commercial statute built on two assumptions about commercial contract law.
The first commercial law theme is that contract law should preserve freedom of contract. This is the same theme that permeates the Uniform Commercial Code as described in Article 2A: "This article was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract . . . These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care."(10)
The idea that parties are free to choose terms can be justified in a number of ways, including the continuing success of the U.S. market economy.(11) In contract law, the idea of contractual freedom generates a preference in contract law for rules that provide background and play only a default or gap-filling function. A default rule applies only if the parties do not agree to the contrary. In UCITA, unless expressly indicated to the contrary, the effect of all of the rules in this Act can be varied by agreement. Section 104. A federal White Paper on global commerce in information strongly endorsed the non-regulatory and contract freedom approach taken in UCITA.
A second commercial law theme defines uniform commercial codification as a means to facilitate commercial practice. Grant Gilmore expressed this in the following terms:
The principal objects of draftsmen of general commercial legislation . . . is to
assure that if a given transaction . . . is initiated, it shall have a specified result;
they attempt to state as a matter of law the conclusion which the business
community apart from statute . . . gives to the transaction in any case.(12)
Commercial practice is the appropriate standard for gauging contract law unless a clear countervailing policy indicates to the contrary or the contractual arrangement threatens injury to third-party interests which social policy desires to protect. Uniform contract laws do not over-ride or regulate contract practice. They support and facilitate it.
UCITA embraces this philosophy. The best source of substantive rules lies not in a theoretical model, but in commercial and trade practice. This is not simple faith in empirical sources for commercial law. It stems from the reality that we may not know how law interacts with contract practice, but decisions about contract law will continue to be made. In those decisions, we should refer for guidance to the accumulation of practical choices made in actual transactions. The goal is a congruence between legal premise and commercial practice so that the transactions between contracting parties achieve commercially intended results. One expression of this policy is in Section 104(b) which states that:
Any usage of trade in the business, trade or industry in which the parties are engaged or of which they are or should be aware, along with any course of dealing or course of performance between parties are relevant to determining the existence or meaning of an agreement.
Transactions range from a casual deal between two individuals to transactions between sophisticated businesses employing lawyers and affecting billions of dollars of business. The approach is not to draft rules that a party would negotiate tailored to each particular case, but to select an intermediate framework whose contours are appropriate, but will often be altered by particular agreements. Like the Uniform Commercial Code, UCITA provides gap-filler rules that apply when the agreement of the parties or the trade and business practices between the parties do not provide applicable terms.
Electronic Commerce
A basic premise is that UCITA should facilitate continued expansion of electronic commerce in computer information. This should be done without any preference for a particular technology. The rules must be technologically neutral.
The advent of the Internet as a commercial information resource has highlighted the importance of "electronic commerce", including electronic contracting issues. UCITA has been one source of principles for development of state law rules on contract aspects of electronic commerce. These rules are coordinated with the Uniform Electronic Transactions Act (UETA). However, they go beyond the purely procedural rules in that Act and provide a general contract law framework for electronic transactions involving computer information, where a contract can be formed and performed electronically.
There are three issues that contract law must deal with in order to facilitate electronic commerce on Internet and similar systems. The first deals with procedural or authorization issues. Electronic commerce entails the use of computers to make and perform contracts. A threshold issue involves whether electronic records and signatures satisfy applicable law that focuses on paper-based signatures and writings. At this writing, almost one-half of all States have already adopted legislation authorizing electronic equivalents to writing requirements. UCITA, along with UETA and proposed revisions of Article 2 and Article 2A establish a uniform state law principle that allows electronic "authentication" as a form of signature, and recognizes the equivalence of electronic "records" and paper writings.
The second issue deals with how one establishes the terms of an electronic contract. UETA does not generally deal with this issue, UCITA builds on two concepts to set out a framework for contracting and establishing contract terms.
• UCITA adapts common law concepts of manifestation of assent to contract terms to apply to electronic contexts. A manifestation of assent (Section 112) binds a party to the contract terms if, in context, the party had reason to know its acts would be treated as assent to the terms. However, this can occur only if the party had an opportunity to review the terms prior to assenting. This requirement, which might be inferred from case law, is made explicit in UCITA. UCITA follows case law holding that an on-screen "click" acceptance is binding, but refines that case law to require that the party had an opportunity to review terms before assenting. A safe harbor of a double click reaffirming assent is provided.
• UCITA resolves that actions of "electronic agents" can establish a contract. The term "electronic agent" refers to automated devices (e.g., computer programs) set out to achieve particular purposes, such as finding and acquiring information. The contract formation rules of UCITA treat the acts of such agents as binding on the party using them, but also provide safeguards to rectify the consequences of any mistake or fraud.
The third issue deals with "attribution," that is, to whom a signature, message or performance is attributed in law. There are a number of approaches to this issue in current law. UCITA adopts the approach Article 4A of the U.C.C. Section 215 places the burden of establishing attribution on the person seeking to benefit from that attribution, but gives legal effect to a commercially reasonable "attribution procedure" used to identify a party. An "attribution procedure" is a procedure agreed to or adopted by the parties, or created by law, to identify a party as responsible for an electronic signature, message or performance. UCITA gives effect to an agreement about attribution only if the applicable procedure is commercially reasonable - a safeguard primarily to the customer who otherwise would be bound to an agreement to a procedure that is less than commercially reasonable. Also, even if the agreement or procedure has an effect, other party can avoid responsibility by proving that the electronic event did not stem from areas under its control or for which it is responsible.
In an information age in which transactions in computer information represent an increasingly large portion of the national economy, the need for a coherent contract law base tailored for the types of transactions and transactional subject matter that characterize this industry is apparent. UCITA marks an important step, providing that basis by drawing on traditional United States commercial contract law principles and on modern practices in computer information. Enactment of this Act will serve to facilitate continued growth of commerce in computer information, truly the industry of the information era.
SECTION 101. SHORT TITLE. This [Act] may be cited as Uniform Computer Information Transactions Act.
SECTION 102. DEFINITIONS.
(a) In this [Act]:
(1) "Access contract" means a contract to obtain electronically 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, 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]. Whether an agreement has legal consequences is determined by this [Act].
(5) "Attribution procedure" means a procedure established by law, administrative rule, or agreement, or a procedure otherwise adopted by the parties, to verify that an electronic event is that of a specific person or to detect changes or errors in the information. The term includes a procedure that requires the use of algorithms or other codes, identifying words or numbers, encryption, callback or other acknowledgment, or any other procedures that are reasonable under the circumstances.
(6) "Authenticate" means:
(A) to sign, or
(B) otherwise to execute or adopt a symbol or sound, or to use encryption or another process with respect to a record, with intent of the authenticating person to:
(i) identify that person; or
(ii) adopt or accept the terms or a particular term of a record that includes or is logically associated with, or linked to, the authentication, or to which a record containing the authentication refers.
(7) "Automated transaction" means a contract formed or performed in whole or in part by electronic means or by electronic messages in which the electronic actions or messages of one or both parties which establish the contract are not reviewed in the ordinary course by an individual before the action or response.
(8) "Burden of establishing", with respect to a fact, means the burden of persuading a trier of fact that the existence of the fact is more probable than its non-existence.
(9) "Cancellation" means an act by a party that puts an end to the contract for breach by another.
(10) "Computer" means an electronic device that can perform substantial computations, including numerous arithmetic operations or logic operations, without human intervention during the computation or operation.
(11) "Computer information" means information in electronic form that is obtained from or through the use of a computer, or that is in digital or equivalent form capable of being processed by a computer. The term includes a copy of information in that form and any documentation or packaging associated with the copy.
(12) "Computer information transaction" means an agreement a primary purpose of which is to require a party to create, modify, transfer, or license computer information or informational rights in computer information. The term includes a support agreement to the extent covered in Section 612.
(13) "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.
(14) "Consequential damages" resulting from breach of contract include (i) any loss resulting from general or particular requirements and needs of which the other party at the time of contracting had reason to know and which could not reasonably be prevented, and (ii) injury to person or damage to other property proximately resulting from any breach of warranty. The term does not include direct or incidental damages.
(15) "Conspicuous", with reference to a term, means so written, displayed, or otherwise presented that a reasonable person against which it is to operate ought to have noticed it. A term in an electronic record intended to evoke a response by an electronic agent is conspicuous if it is presented in a form that would enable a reasonably configured electronic agent to take it into account or react without review of the record by an individual. Conspicuous terms include 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 call attention to the language; and
(iii) a term prominently referenced in an electronic record or display which is readily accessible and reviewable from the record or display; and
(B) with respect to a person or an electronic agent, a term or reference to a term that is so placed in a record or display that the person or electronic agent can not proceed without taking some action with respect to the term or reference.
(16) "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 profit-making, professional, or commercial purposes, including agriculture, business management, and investment management other than management of the individual's personal or family investments.
(17) "Consumer contract" means a contract between a merchant licensor and a consumer.
(18) "Contract" means the total legal obligation which results from the parties' agreement as affected by this [Act] and any other applicable rules of law.
(19) "Contract fee" means the price, fee, rent, or royalty payable in a contract under this [Act].
(20) "Contractual use restriction" means an enforceable restriction created by contract which concerns the use or disclosure of, or access to licensed information or informational rights, including a limitation on scope or manner of use.
(21) "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.
(22) "Course of dealing" means a sequence of previous conduct between the parties to a particular transaction which establishes a common basis of understanding or interpreting their expressions and other conduct.
(23) "Course of performance" means a sequence of conduct in a contract that involves repeated occasions for performance if a party, with knowledge of the nature of the performance and opportunity to object to it, accepts or acquiesces in the repeated performance without objection.
(24) "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.
(25) "Delivery," with respect to a copy, means the voluntary physical or electronic transfer of possession or control.
(26) "Direct damages" means compensation for losses measured by Section 808(b)(1) or 809(a)(1). The term does not include consequential or incidental damages.
(27) "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, or electromagnetic, or similar capabilities.
(28) "Electronic agent" means a computer program, or electronic or other automated means used independently to initiate an action or respond to electronic messages or performances without intervention by an individual at the time of the action, response or performance.
(29) "Electronic event" means an electronic authentication, display, message, record, or performance.
(30) "Electronic message" means a record or display stored, generated, or transmitted by electronic means for the purposes of communication to another person or electronic agent.
(31) "Financial accommodation contract" means an agreement under which a person extends a financial accommodation to a licensee which agreement does not create a security interest in a transaction that is subject to [Article 9 of the Uniform Commercial Code]. The agreement may be in any form, including a license, lease, or software lease.
(32) "Financial services transaction" means a contract or a transaction that provides access to, use, transfer, clearance, settlement, or processing of:
(A) deposits, loans, funds, or monetary value represented in electronic form and stored or capable of storage electronically and retrievable and transferable electronically, or other right to payment to or from a person;
(B) an instrument or other item;
(C) a payment order, credit card transaction, debit card transaction, or a funds transfer, automated clearing house transfer, or similar wholesale or retail transfer of funds;
(D) a letter of credit, document of title, financial asset, investment property, or similar asset held in a fiduciary or agency capacity; or
(E) related identifying, verifying, access-enabling, authorizing, or monitoring information.
(33) "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, modifications, or maintenance for the information.
(34) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.
(35) "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 are the subject of the breach;
(ii) stopping delivery, shipment, or transmission;
(iii) effecting cover, return, or retransfer of copies or information after the breach of contract;
(iv) reasonable efforts after the breach otherwise to minimize or avoid loss resulting from the breach; and
(v) matters otherwise incident to the breach; and
(B) does not include consequential or direct damages.
(36) "Individual" means a human being.
(37) "Information" means data, text, images, sounds, mask works, or computer program, including collections or compilations thereof.
(38) "Information processing system" means an electronic system for creating, generating, sending, receiving, storing, displaying, or processing information.
(39) "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. The term does not include computer instructions that control the interaction of a computer program with other computer programs or with a machine or device.
(40) "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.
(41) "Knowledge", with respect to a fact, means that a person has actual knowledge of the fact.
(42) "License" means a contract that authorizes access to, use of, distribution, display, performance, modification, or reproduction of information, or use of informational rights, and expressly limits the contractual rights, permissions, or uses granted, expressly prohibits some uses, or expressly grants less than all rights in the information. A contract may be a license whether or not the transferee has title to a licensed copy. The term includes an access contract and a consignment of a copy. The term does not include a reservation or creation of a security interest.
(43) "Licensee" means a transferee in a license or other agreement under this [Act]. A licensor is not a licensee with respect to rights reserved to it under the agreement.
(44) "Licensor" means a transferor in a license or other agreement under this [Act]. 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 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 provides.
(45) "Mass-market license" means a standard form that is prepared for and used in a mass-market transaction.
(46) "Mass-market transaction" means a transaction under this [Act] 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 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.
(47) "Merchant" means a person that deals in information or informational rights of the kind or that otherwise by the person's occupation holds itself out as having knowledge or skill peculiar to the practices or information involved in the transaction, or a person to which such knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that by its occupation holds itself out as having such knowledge or skill.
(48) "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.
(49) "Notice" of a fact means that the person has actual knowledge of it, has received notice or notification of it, from all the facts and circumstances know to it, has reason to know that the fact exists.
(50) "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.
(51) "Party", as distinguished from "third party", means a person that has engaged in a transaction or made an agreement within this [Act].
(52) "Person" includes an individual or an organization.
(53) "Present value" means the value, as of a date certain, of one or more sums payable in the future or one or more performances due in the future, discounted to a date certain. The discount is determined by the interest rate specified by the parties in their agreement unless that rate was manifestly unreasonable when the transaction was entered into. Otherwise, the discount is determined by a commercially reasonable rate that takes into account the circumstances of each case when the agreement was entered into.
(54) "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 an individual or group of 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.
(55) "Reasonable time" means any time which is not manifestly unreasonable. What is a reasonable time for taking an act depends on the nature, purpose and circumstances of such act.
(56) "Reason to know", with respect to a fact, means that:
(A) a person has knowledge of the fact; or
(B) from all the facts and circumstances known to the person without investigation, the person should be aware that the fact exists.
(57) "Receive" means:
(A) with respect to a copy, to take delivery; or
(B) with respect to a notice:
(i) to come to a person's attention; or
(ii) to be delivered to and available at a location or system designated by agreement for that purpose or, in the absence of an agreed location:
(I) to be delivered at the person's residence, or the person's place of business through which the contract was made, or at any other place held out by the person as a place for receipt of communications of the kind; or
(II) in the case of an electronic notification, to come into existence in an information processing system in a form capable of being processed by or perceived from a system of that type by a recipient, if the recipient uses, or otherwise has designated or holds out that system or address as a place for receipt of notices of the kind and the sender does not know that the notice cannot be accessed from the particular system of the recipient.
(58) "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.
(59) "Release" means an agreement not to object to, or exercise any remedies to limit, the use of information or informational rights, if the agreement requires no affirmative act by the party giving the release to enable or support the other party's use of the information or informational rights. The term includes a waiver of informational rights.
(60) "Return", with respect to information to which a rejected record applies, means:
(A) with respect to a licensee that rejects a record:
(i) with respect to a single information product transferred for a single contract fee, reimbursement of any contract fee paid from the person to which it was paid or from another person that may offer to reimburse that fee, and a right to stop payment of the contract fee, on proof of purchase and return of the information and all copies within a reasonable time after delivery to the licensee; and
(ii) with respect to an information product provided as part of multiple information products integrated into a bundled whole but retaining their separate identity and transferred for one contract fee:
(I) if the record is rejected before or during the initial use of the bundled product and that product is returned without further use and along with all other information products bundled along with it, reimbursement of the aggregate contract fee for all bundled information products, on proof of purchase and return of all the bundled products and all copies within a reasonable time after delivery; or
(II) if a separate fee was identified by the licensor as charged to the licensee for a particular bundled information product, reimbursement of any separate contract fee paid for the separate information to which the rejected record applies, on proof of purchase and return of that information and all copies within a reasonable time after delivery; and
(B) with respect to a licensor that rejects a record proposed by the licensee, a right to receive redelivery of the information from the licensee, to stop delivery or access to the licensee, and reimbursement from the licensee of amounts paid by the licensor with respect to the rejected record along with reimbursement to the licensee of fees that it paid with respect to the rejected record.
(61) "Scope", with respect to a license, means terms defining:
(A) the licensed copies, information, or informational rights involved;
(B) the use or access authorized, prohibited, or controlled;
(C) the geographic area, market, or location; and
(D) the duration of the license.
(62) "Seasonable" with respect to an act, means taken within the time agreed or, if no time is agreed, at or within a reasonable time.
(63) "Send" means, with any costs provided for and properly addressed or directed as reasonable under the circumstances or as otherwise agreed, to (i) deposit in the mail or with a commercially reasonable carrier, (ii) deliver for transmission to or re-creation in another location or system, or (iii) take the steps necessary to initiate transmission to or re-creation in another location or system. In addition, with respect to an electronic message, the term means to initiate operations that in the ordinary course will cause the record to come into existence in an information processing system in a form capable of being processed by or perceived from a system of that type by the recipient, if the recipient uses or otherwise has designated or held out that system or address as a place for the receipt of communications of the kind. Receipt within the time in which it would have arrived if properly sent has the effect of a proper sending.
(64) "Software" means a computer program, informational content included in the program, and any supporting information provided by the licensor.
(65) "Software lease" means a lease of a copy of a computer program, whether or not the lease is a lease under [Article 2A of the Uniform Commercial Code].
(66) "Standard form" means a record or a group of related records containing terms prepared for repeated use in transactions and so used in a transaction in which there was no negotiation by individuals except to set the price, quantity, method of payment, selection among standard options, or time or method of delivery.
(67) "Term", with respect to an agreement or contract, means that portion of an agreement which relates to a particular matter.
(68) "Termination" means the ending of a contract by either party pursuant to a power created by agreement or law otherwise than for its breach.
(69) "Transfer":
(A) with respect to a contractual interest, includes an assignment of the contract, but does not include an agreement to perform a contractual obligation or exercise contractual rights through a delegate or a sublicensee; and
(B) with respect to computer information, includes a sale or lease of a copy as well as an assignment of informational rights in computer information.
(70) "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) The following definitions in [the Uniform Commercial Code] apply to this [Act]:
(1) "Document of title" [Section 1-201].
(2) "Financial asset" [Section 8-102(a)(9)].
(3) "Funds transfer" [Section 4A-104] (as applied to credit orders).
(4) "Identification" to the contract [Section 2-501].
(5) "Instrument" [Sections 9-105(i)] (1995 Official Draft); [9-102(a)(47)] (1998 Approved Draft).
(6) "Item" [Section 4-104].
(7) "Investment property" [Section 9-115(f)] (1995 Official Draft); [9-102(a)(49)] (1998 Approved Draft).
(8) "Lease" [Section 2A-102].
(9) "Letter of credit" [Section 5-102].
(10) "Negotiable instrument" [Section 3-104].
(11) "Organization" [Section 1-201].
(12) "Payment order" [Section 4A-103] (as applied to credit orders).
(13) "Purchase" [Section 1-201].
(14) "Purchaser" [Section 1-201].
(15) "Sale" [Section 2-106].
(16) "Security interest" [Section 1-201].
1. "Access contract." An access contract authorizes access to an electronic facility, including a computer or an Internet site, or authorizes obtaining information from that type of facility. The term does not include contracts that grant a right to enter a building or other physical location. Nor does it include the purchase of a television, radio, or other similar goods merely to create a technological ability to access information, when such purchase is not a contractual authorization for access. The term "access contract" is typified by "on-line" and Internet services, but also includes contracts for remote data processing, third party e-mail systems, and contracts allowing automatic updating from a remote facility to a database held by the licensee.
The term does not encompass ordinary interactions among licensed computer programs within a single system; such transactions do not involve access to a system of another person. However, if an on-line data provider elects to provide access in part by allowing its database to be loaded into the computer of a client, this method of performance retains all of the characteristics of an access arrangement and is within the definition. Thus, if the provider arranges with a high volume user to transfer all or part of the provider's database to the client's system, allowing access and use on the same terms as in the provider's system, the arrangement is an access contract. The same is true if the contract provides a copy of the database on media to be loaded into the user's system, but the data are intermittently updated through transfers of data from remote systems. On the other hand, if a software publisher simply allows access to and downloading of software into a licensee's systems, the continuing right to use the software after it is downloaded is a license, but not an access contract.
Many access contracts do not depend on intellectual property rights. The owner of a computer system has a fundamental right to exclude others from access to its system and to condition the terms on which it permits access. This does not mean that access to identical information cannot be obtained elsewhere, but merely that the access provider can establish contractual terms of access that bind the other party even though the licensee could, if it chose, obtain identical information from other sources or its own research.
An access provider may, or may not, be in a position to give contractual rights in the information accessed. In some cases, that information is controlled by the access provider, while others entail a three-party framework. In a three-party relationship, one party provides access, while another (the content provider) licenses use of the information. This latter transaction involves two and, in some cases, three contracts. The first is between the content provider and the access provider. This may be an ordinary license or an access contract that gives the access provider a right to provide a gateway to information contained in a system controlled by the content provider. The second is between the access provider and the end user. This is an access contract. The third arises if the content provider contracts directly with the end user, that too is an access contract. The various contracts are independent of each other.
2. "Attribution procedure." An "attribution procedure" refers to an agreed, adopted, or otherwise established procedure to identify the person who sent an electronic message, or to verify the absence of changes in the message content. Agreement to or adoption of a procedure may occur between the two parties or through a third party. For example, the operator of a multi-database system which includes databases provided by third parties, may arrange with database providers and customers for agreement to or adoption of a particular attribution procedures. Those arrangements, although made with the third party, may establish an attribution procedure for purposes of this Act between the customers and the individual database providers.
Electronic commerce is anonymous in character and depends on such procedures and their recognition in law and practice. The effect of an attribution procedure is discussed in Sections 108, 215, and 216. The legal benefits of using an attribution procedure only apply to commercially reasonable procedures. See Section 214.
3. "Authenticate." This term replaces "signature" and "signed," terms which are more appropriate for paper transactions than for electronic transactions. The definition clarifies that qualifying electronic systems are adequate. However, any act that would be a signature under prior law is an authentication. Similarly, the definition indicates two purposes for which an authentication can be intended. This list refers only to the use of the term within this Act. It does not alter general concepts about the use of signatures, initials, or the like in which, for example, a signature may be intended to establish or confirm the integrity of the content of the signed record.
Like a signature, an "authentication" may express various effects. The definition focuses on effects that may be relevant to the provisions of this Act, namely: (i) identifying the person, and (ii) adoption of a record or specific term(s). An authentication may have other functions such as confirmation of the content of the authenticated record. Omission of that function from the definition does not change law or alter the ability of the parties to use an authentication for that purpose. As under prior law for "signature," what effects are intended are determined by the context and objective indicia associated with that context. Authentication may be on, logically associated with, or linked to the record. Subparagraph (B) follows the proposed EU Directive on Electronic Signatures and reflects the fact that, in digital technology, the analogy between "signing" a record electronically and signing a paper is not precise. "Logically associated" makes it clear that the association between an authentication and record need not be physical in nature. It can be electronic. However, there must be a direct association such that it can be reasonably inferred that the authenticating party intends by that act to adopt or accept the associated record. The reference to "linked" captures a similar concept applicable to current technology in the Internet and similar systems, indicating that it is adequate to have an electronic connection, such as an Internet hyperlink.
Authentication includes qualifying use of identifiers such as a PIN number, a types or otherwise signed name. It includes qualifying actions and sounds such as encryption, voice and biological identification, and other technologically enabled acts. The term does not include entirely transient communications, such as a mere verbal statement of agreement. On the other hand, a voice print, voice recognition, or similar technology is adequate, even though such might not involve a retained record. In many situations, such as those involving the use of PIN numbers or similarly sensitive identifiers, neither party will desire to record and retain a record of the identifier even though its use can constitute an authentication.
In "digital signature" systems, the term "authentication" is sometimes used differently. In those systems, it is common that one party applies an encryption technology to a record or message and a second party (recipient) take actions that confirm the identity of the party. Sometimes, the recipient's confirming actions are referenced as "authenticating" the record. That usage is not followed in this Act. In this Act, "authenticate" describes the acts (and intent) of the person executing the symbol or taking the initial action and not what another party (the recipient) does to confirm the identity of the other person or its acceptance of the record. Authenticate refers to the signing, not the confirming, step in digital signature or other technologies.
The definition is technologically neutral. Technology and commercial practice are evolving and no specific standards of technological sufficiency are appropriate. Rather, procedures are subject to evidentiary scrutiny as to the requisite intent, proof that they were used, and assessment of whether the procedures are commercially reasonable.
4. "Automated transaction." This term refers to contracts formed automatically and which become effective even though one or both of the parties are represented by an electronic system, rather than a human being. Automated contracting is widely used. While law could fictionally attribute intent to these automated activities, this Act recognizes that operations of automated systems can create binding legal obligations for those who use them for that purpose.
5. "Cancellation." This definition is from original Section 2-106 of the Uniform Commercial Code. The effect of cancellation is stated in Section 802.
6. "Computer information." This term focuses on information that is in an electronic form that is accessible and useable by a computer. The reference to "equivalent form" refers to analog and any future computational technologies, eliminating the possibility that a reference to "digital" technology would otherwise lock the scope of the Act to a particular, current technology. The term does not cover information merely because it could be scanned or otherwise entered into a computer, but is limited to electronic information in a form capable directly of being processed in a computer. The term does not generally include printed information or other non-digital formats in which information is encompassed, but which are not directly useable in computer systems.
The term includes the information as well as the copy of the information (e.g., diskette containing the information) and its documentation. As discussed in the notes to Section 103, the term includes treatment of "embedded computer" programs, providing a basis to distinguish between situations in which the computer information is merely incidental to goods.
7. "Computer information transaction." This term refers to transactions where the primary focus of the transaction includes the computer information. It does not cover information that is merely incidental to a transaction. On the other hand, the term is not limited to cases where the computer information is the single primary purpose of the deal. In many cases, aspects of a transaction focus on computer information, while other aspects focus on goods or other contractual subject matter. As indicated in Section 103(b), where there is a blend of goods and computer information, this Act will apply to the computer information, while Article 2 or 2A of the Uniform Commercial Code apply to the goods.
The mere fact that information related to a transaction is sent or recorded in digital form is not sufficient to be within this definition. The creating, modifying or obtaining the computer information itself must be a primary purpose of the agreement. Thus, a contract for airplane transportation is not a transaction within this Act simply because the ticket is in digital form. The subject matter is not the computer information, but the service - air transportation from one location to another. The term does not apply to the many cases in which a person provides information to another person for purposes of another transaction such as making an employment or loan application.
A computer information transaction be a transaction to create or modify computer information. This includes agreements such as software development contracts. However, a transaction is not for the creation of computer information in the sense intended here where the contracted-for activities are merely secretarial or clerical in nature. The computer information must be produced through some business, professional, artistic, or imaginative effort. This Act also does not cover contracts to create print books or articles since these do not focus on computer information.
8. "Computer program." The first sentence parallels copyright law. 17 U.S.C. § 101 (1998). In this Act, a distinction exists between computer programs as operating instructions and "informational content" communicated to people. "Computer program" refers to functional and operating aspects of a digital system, while "informational content" refers to output that communicates to a human being. There is an inevitable overlap. However, if issues arise that require a close distinction, the answer lies in whether the issue addresses operations (program) or communicated content (informational content). This issue pertains solely to contract law issues under this Act. It does not relate to the copyright law question of distinguishing between a process and copyrightable expression. The distinction here is more like that made in copyright law between a computer program as a "literary work" (code) and output as an "audiovisual work" (images, sounds). In copyright, the distinction relates to whether a copyrighted work was created or infringed. In this Act, the distinction relates to contract law issues in determining liability risk and performance obligation.
9. "Consequential damages." Consequential damages do not include "direct" or "incidental" damages. Consequential loss deals with loss of benefits anticipated as a result of not being able to exploit the expected contracted performance. These damages include lost profits resulting from that lost opportunity, damages to reputation, lost royalties expected from a licensee's proper performance, lost value of a trade secret from wrongful disclosure or use, wrongful gains for the other party from misuse of confidential information, loss of privacy, and loss or damage to data or property caused by a breach.
Consequential damages may be recovered by either party. The losses must be an ordinary and predictable result of the breach. In the case of economic and similar losses, they must be foreseeable. This means that, for the injured party to recover compensation for losses resulting from its special circumstances, the party in breach must have had notice of those circumstances at the time of contracting. The particular needs and circumstances must be made known at that time. In contrast, losses from ordinary general requirements can often be presumed to have been within the contemplation of the other party. In addition, of course, to be foreseeable the losses must not derive from atypical risk taking by the aggrieved party, such as in a failure reasonably to maintain back-up systems for retrieval of data.
The burden of proving loss is on the party claiming damages. This Act does not require proof with absolute certainty or mathematical precision or beyond the standard of proof at common law, but does not permit recovery of losses that are speculative or otherwise highly uncertain. See Section 707 and Restatement (Second) of Contracts § 352 ("Damages are not recoverable for loss beyond the amount that the evidence permits to be established with reasonable certainty."). See also Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 357 N.Y.S.2d 857, 314 N.E.2d 419 (1974) ("[Plaintiff's] expectancy interest in the royalties . . . was speculative."). No change in law is intended.
The definition does not specifically refer to mitigation through cover, but the concept of mitigation (including cover) limits all damage claims under Section 807. No change in law is intended by deletion of the reference to "cover" from the original definition in the U.C.C. A party can recover compensation only for losses that it could not reasonably have prevented by cover or otherwise.
The definition continues current law as to recovery of damages for personal injury or property damage that "proximately" resulted from the breach. For example, where the injury follows use of a computer program without discovery of a defect causing the damage, the question of "proximate" cause turns on whether it was reasonable for the licensee to use the information without an inspection that would have revealed the defect. If it was not reasonable for it to do so or if the licensee did in fact discover the defect prior to use, the injury would not proximately result from the breach of warranty. Also, proximate causation may not exist where the damages are the result of a misuse of the computer information or a use that violates clear warnings against the particular type of use.
Under the standard stated here, damage to other property (e.g., property not within the contract itself) constitutes consequential damages. However, the term does not include direct damages. Thus, for example, a breach of a non-infringement warranty or a breach of an indemnity obligation for cases of liable, are direct damages indicating that the performance had less value than expected.
10. "Conspicuous." This definition follows original Article 1 of the U.C.C., but adjusts the standard to reflect modern practice. Whether a term is conspicuous is a question to be determined by the court. Section 106. The basic rule is that a term is conspicuous with respect to a person if it is so positioned or presented that the attention of an ordinary individual can reasonably be expected to be called to it. Often, this involves presentation in a record, but the concept is not so limited; it includes verbal or automated voice presentation that meets the basic standard. Whether a term is conspicuous is gauged by the condition of the message as it would be received or first viewed by a person using an ordinary system or method of receiving or reviewing such messages. If a transaction involves use of an electronic agent, presentation of the term must be such as to be capable of invoking a response from a "reasonably configured" electronic agent.
As under prior law, this Act delineates some methods of making a term conspicuous. These have an important role in commercial practice. The purpose of requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving certainty to the party relying on the term on how that result can be achieved). The illustrations establish safe harbors intended to reduce uncertainty and litigation. A term that reasonably conforms is conspicuous. The illustrations, however, are not exclusive. In cases outside the illustrative safe harbors, a court should apply the general standard.
The definition encompasses methodologies relevant in modern commerce, including electronic commerce. Paragraph (A)(ii) contemplates setting off the term or a label by symbols so that conspicuous formatting can be reliably transferred in electronic commerce (font size, color and other attributes might not always be so transferable). It includes a term or reference that provides: *** Disclaimer *** or <<< Disclaimer >>>. Paragraph (A)(iii) deals with hyperlinks and related Internet technologies. It contemplates a case in which a computer screen displays an image or term, or a summary or a reference to the term and the party using the screen, by taking an action with reference to the display, 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 term. The access must be from the display and not by taking other actions such as a telephone call or physically going to a location such as by driving to a store. When the term is accessed, it must be readily reviewable. The fact that an entire record is prominently referenced does not automatically mean that a particular term in that record is conspicuous.
Paragraph (B), which operates independently of paragraph (A), recognizes a procedure by which, without taking action with respect to the term or reference, the party cannot proceed further in reference to the display or location. Thus, a screen that states: "There are no warranties of accuracy with respect to the information" and is displayed in a way that precludes the user from proceeding without assent to or rejection of this condition, suffices.
The deletion of the word "clause" from Article 1 of the Uniform Commercial Code is not substantive. The definition, however, does reject the Article 1 view that all terms in a "telegram" are conspicuous and also requires, unlike current law, that for a heading to be conspicuous it must be in larger or contrasting type than the surrounding text. As to telegrams, since a "telegram" includes "any mechanical method of transmission", no rule that the terms are automatically conspicuous is justified.
11. "Consumer." A "consumer" is an individual that obtains information primarily for personal, household, or family purposes. Whether an individual is a consumer with reference to a particular transaction is determined at the time of contracting. It depends on the then intended use of the information. Many "personal" uses of information or informational rights are not consumer uses (e.g., stock broker personally using software to monitor client investments). The definition distinguishes profit making, professional or business use, from primarily non-business personal or family use, treating only the latter as a consumer use. A purpose stated in the agreement would ordinarily determine the purpose of the transaction for this definition.
The second sentence clarifies an important issue, but does not alter the definition of "consumer" as properly applied. A transaction providing information for profit-making or income production is not a consumer transaction, unless it is for ordinary family asset management. The profit-making standard is followed in many of areas of law. See, e.g., Thomas v. Sundance Properties, 726 F.2d 1417 (9th Cir. 1984); In re Booth, 858 F.2d 1051 (5th Cir. 1988); In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987); Truth in Lending Act, 15 U.S.C. § 1603 (excluding "extensions of credit primarily for business, commercial, or agricultural purposes").
12. "Contract fee." This term includes any money payment required under a contract.
13. "Contractual use restriction." This term includes any enforceable restriction on use or disclosure of information or informational rights created by a contract under this Act. Use restrictions relate only to the copies and information provided under the license. Unless otherwise expressly indicated, a contractual use restriction does not restrict use of the same information lawfully obtained from other sources. The restriction must come from a contract. The term does not include limitations imposed by property or regulatory law. The definition does not include terms unenforceable under this Act or other law, including laws which limit enforcement of some restrictions on use of information. Thus, if trade secret law precludes enforcement of a particular non-disclosure or non-competition term, that term is not a contractual use restriction to the extent of its unenforceability.
14. "Copy" refers to the media containing information and not the information itself. In this Act, the term relates to questions associated with contractual events such as delivery, tender, and enabling use. For these purposes, in appropriate cases, the time during which the information is fixed on a particular medium can be temporary. For example, an agreement to deliver a copy of information that can be reviewed by the transferee for one hour is met by delivery of or access to the information from a tangible medium on which it remains only for one hour. This Act does not deal with the copyright law question of whether a brief reproduction in computer memory is an infringement under copyright law. Stenograph v. Bossard, 46 U.S.P.Q.2d 1936 (D.C. Cir. 1998); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993).
15. "Delivery." Delivery can occur either through transfer of possession of a tangible copy or by electronic transfer. Under modern technology, it is often true that in electronic transfers a copy does not move from one location to another. Transfers more often involve copying the information into another location or making it available in a common system shared or accessible by the recipient and the person making the delivery.
16. "Direct damages." Direct damages are compensation for losses associated with the value of the contracted for performance itself as contrasted to loss of a benefit expected from intended use of the performance or its results. Direct damages are measured by formulae in Sections 808(b) and 809(a). They are capped by the contracted for price and the market value of other consideration for the performance as appropriate. This definition rejects cases that treat as direct damages losses that relate to anticipated benefits from use of information such as Chatlos Systems, Inc. v. National Cash Register Corp., 670 F.2d 1304 (3d Cir. 1982). Those are consequential damages. Thus, if 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. If there is a failure to perform a contractual indemnification term, the amount to be indemnified is a form of direct damages in that it is a direct contractual obligation of a party.
17. "Electronic." While most modern information systems use electronic technologies, the term is open-ended and encompasses forms of information processing technology that may be developed in the future.
18. "Electronic agent." This term is part of the framework for recognition of electronic commerce and automated contracting. It refers to an automated means for making or performing contracts. The agent must act independently. Thus, mere use of an automated means such as a telephone or e-mail system does not entail use of an electronic agent. The term includes a computer program, but is not limited to that technology. The automated system must have been selected, programmed or otherwise used for that purpose by the person to be bound by its operations. In automated transactions, an individual does not deal with another individual, but one or both parties are represented by electronic agents. As indicated in Sections 206 and 215, the legal relationship between the person and the automated agent is not fully equivalent to common law agency, but takes into account that the "agent" is not a human actor. Parties who employ electronic agents are ordinarily bound by the results of their operations.
19. "Electronic Message." A message is distinguished from a "record" by the fact that it is intended to be communicated to another person or an electronic agent; it does not merely serve as a medium for recording information. Communication in modern technology does not necessarily require that the message move from one location to another. Communication of a message may entail copying it into another location or making it available in a common system shared by or accessible to the recipient. In effect, it is "stored" for purposes of communicating to another. Two different types of message are included. One, such as a fax, a telex, or an e-mail, is intended for a human recipient. The second type involves information communicated where the intended recipient is a computer or computer program operating without review by a human.
20. "Good Faith." This definition expands the standard in original Section 2-103(b) of the U.C.C. and rejects the pure "honesty in fact" standard. While good faith in performance is an element of all contracts, the concept does not over-ride express contract terms or their enforcement. See Kham & Nates Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990); Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo. 1995); Badgett v. Security State Bank, 116 Wash.2d 563, 807 P.2d 356 (1991). A lack of good faith cannot be shown simply by the fact that the party insisted on compliance with the express terms of the agreement. The primary focus of the concept applies if a party has discretion under the contract and requires that the discretion should be exercised in a good faith manner. Davis v. Sears, Roebuck & Co., 873 F.2d 888 (6th Cir. 1989).
Good faith is not a negligence or reasonable care standard. Fair dealing is concerned with the fairness of the conduct rather than the care with which an act is performed. A failure to exercise ordinary care in a transaction is an entirely different concept than failure to deal fairly. Both fair dealing and ordinary care are judged in light of reasonable commercial standards, but the standards in each case are directed to different aspects of commercial conduct. The fair dealing concept does not alter the rule that good faith obligations do not over-ride, or create new, contractual obligations. See Ohio Casualty Company v. Bank One, 1997 WL 428515 (N.D. Ill. 1997).
This definition does not support an independent cause of action for failure to perform or enforce in good faith. Rather, a failure to perform or enforce in good faith a right, duty or obligation under a contract, is a breach of contract. The doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached. See PEB Report No. ___.
21. "Incidental damages." Incidental damages are expenses incurred after breach. The term includes the cost of seeking or arranging for mitigation, but not the actual expenditure for the mitigation itself. Thus, if a licensee must obtain a different computer program because of a breach, the telephone calls and related expenses in arranging for the cover are incidental damages. The cost of the new program may be considered in computing direct damages.
22. "Information." This term embraces a wide range of subject matter, but of course its use in this Act is limited to transactions within the scope of this Act. The term includes information in the form or computer information as well as information that is the subject matter of the transaction and is to be transformed into computer information. As used here, "data" refers to facts whether or not organized or interpreted. The term is not limited to subject matter to which informational property rights attach. It includes factual data if the data are the subject of a contractual relationship. "Work of authorship" is defined in the Copyright Act and refers to expressive works to which copyright may attach. The federal definition includes literary works, computer programs, motion pictures, compilations, collected works, audiovisual works and the like. A "mask work" is also defined in federal law; the term refers to a representational technology used in creation of semiconductor products.
23. "Informational content." This term refers to information whose ordinary use involves communication of the information to a human being. This is the information people read, see, hear and otherwise experience. For example, if an electronic database of images includes the images and a program enabling display or access to the images, the images are informational content while the search program is not. The Westlaw search program is not informational content, but the text of cases and statutes is informational content. The term applies even if the person creating the content does not intend others to see or have access to it since, in that case, the preparation nevertheless reflects an intent that the information be perceivable by its creator.
24. "Information processing system." This definition corresponds to the UNCITRAL Model Law on Electronic Commerce. It includes computers and other information processing systems. In this Act, the term is used primarily in reference to sending and receiving notices. In that context, whether the receiving system is as a computer is not pertinent so long as it provides notice-giving or receipt functions.
25. "Informational rights." This term includes, but is not limited to "intellectual property" rights such as rights under patent, trademark, copyright, trade secret, and mask work law. It also includes rights created under any law that gives a person a right to control use of information independent of contract, such as may be developing with reference to privacy law and the right of publicity. Other laws determine when such rights exist and, as with traditional intellectual property law, the rights need not be comprehensive or exclusive as to all other persons and all uses. The term does not include mere tort claims such as the right to sue for defamation.
26. "License." A license is a limited or conditional contractual transfer of information or a grant of limited or restricted contractual rights or permissions to use information. A contract "right" entails an affirmative commitment that a party can engage in a specific use, while a contract "permission" means simply that the licensor will not object to the use. Either can be the basis of a license. No specific formality of language of grant or restriction is required. For purposes of this Act, the term includes consignments of copies of information, but does not otherwise alter the nature of a consignment. As indicate by the preface to this definitions section, however, this treatment is solely for purposes of this Act and does not alter applicable law or 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 a unrestricted sale of a copy; sales lack express contractual restrictions on use. Similarly, a "copyright notice" which merely informs the buyer of, the rights and restrictions associated with a first sale under copyright law does not change a sale of a copy into a license. To be a license, the contract must control the rights. A license exists if a contract grants greater privileges than a first sale, restricts privileges that might otherwise exist, or deals with issues that are not attributes of a first sale. Whether such terms are enforceable is determined under this Act and applicable federal law. Under copyright law, restrictions in a license that are amt4rially inconsistent with ownership of a delivered copy may result in the holder of the copy not being treated as the copy owner. See DSC v. Pulse Communications, Inc., ___ F.3d ___ (Fed. Cir. 1999).
A license is a contract. To create the contractual restrictions that characterize a license, the requirements for an agreement must be met. Language on a copy that restricts use to educational purposes creates a license if the limitation is part of the agreement. A mere copyright notice may or may not be part of an agreement. This Act does not address whether or not such a notice is enforceable under other law. Similarly, the term does not include the myriad of non-commercial, casual or other exchanges of information that occur in normal political or social discourse even though there may be incidental restrictions on use of the information. These casual exchanges are not within this Act because they do not involve a contractual relationship even if a strained analysis might argue that an enforceable promise was made concerning the information itself. Thus, when a friend approaches another and offers to describe the marital problems of a third party if the other does not "tell anyone else," that exchange of information is not a license under this Act because it is not a contract and because it does not entail a computer information transaction.
Whether a license is created does not depend on whether the contract transfers title of a copy. Title to a copy is distinct from questions about the extent to which use of the information is controlled by a license. A license pertains to rights in information and the copy is the conduit, not the focus of the transaction. The analysis in DSC v. Pulse Communications, Inc., ___ F.3d ___ (Fed. Cir. 1999) indicates how the issues may be separable.
27. "Licensor" and "Licensee." These definitions refer to the transferee and transferor in any contract covered by this Act, whether or not the contract is a license.
28. "Mass-market license" and "mass-market transaction." The definition of "mass market" must be applied in light of its intended and limited function. That function is to describe small dollar value, routine and anonymous transactions involving information that is directed to the general public in cases where the transaction occurs in a retail market available to and used by the general public. The term includes all consumer contracts and some transactions between business in a retail market. It does not include ordinary commercial transactions between businesses using ordinary commercial methods of acquiring or transferring commercial information.
A "mass-market" transaction is characterized by (1) the market in which the transaction occurs, (2) the terms of the transaction, and (3) the nature of the 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. The prototypical retail market is a department store, grocery store, gas station, shopping center, or the like. These locations are open to, and in fact attract, the general public as a whole. They are also characterized by the fact that, while retail merchants make transactions with other businesses, the predominant type of transaction involves consumers. In a retail market, the majority of the transactions also involve relatively small quantities, non-negotiated terms, and transactions to an end user rather than a purchaser who plans to resell the acquired product. The products are available to anyone who enters the retail location and can pay the stated price.
"Mass-market" refers to transactions that involve information aimed at the general public as a whole, including consumers. This does not include information products for a business or professional audience, a subgroup of the general public, members of an organization, or persons with a separate relationship to the information provider. In determining when is a distribution to the general public, courts should rely on the purpose of the definition which is to avoid artificial distinctions among business and consumer purchasers in an ordinary retail market where the purchasers have relatively similar expectations shaped by the retail environment itself. The transactions covered are purchases of true mass-market information and do not include specialty software for business or professional uses, information for specially targeted limited audiences, commercial software distributed in non-retail transactions, or professional use software. The transactions involve information routinely acquired by consumers or that appeals and intends to appeal to a general public audience as a whole, including consumers. Generally, this is inconsistent with substantial customization of the information for a particular end user. Customization that is routine in mass markets or that is done by the licensee after acquiring the information does not take the information, and therefore the transaction, outside the concept of a mass-market transaction.
The transaction must be with an end user. An end user licensee is one that generally intends to use the information or the informational rights in its own internal business or personal affairs. An end user in this sense is not engaged in the business of reselling, distributing, or sub-licensing the information or rights to third parties, or in commercial public performances or displays of the information, or in otherwise making the information commercially available to third parties.
The definition excludes a transaction for redistribution or for public display or performance of a copyrighted work. These are never a mass-market transaction because they involve no attributes of a retail market. In the on-line world, consumer contracts are mass-market transactions. However, the definition, by excluding on-line transactions not involving a consumer establishes an important principle. In the new transactional environment of on-line commerce, it is important not to regulate transactions beyond consumer issues. This gives commerce room to develop while preserving consumer interests.
29. "Merchant." This definition follows original Article 2 of the U.C.C. The definition covers a person that holds itself out as experienced even though the person did not actually engage in prior transactions of the type involved to qualify as a merchant. The term "merchant" has roots in the "law merchant" concept of a professional in business. This status may be based upon specialized knowledge as to the information, specialized knowledge about the business practices, or specialized knowledge as to both. Which kind of specialized knowledge may be sufficient to establish merchant status is indicated by the nature of the provisions. In this Act, the term refers primarily to businesses with general knowledge of business practices, rather than to experts in a specific field. Sections 401(a) and 401(e), and Section 403, however, require a more focused expertise in the particular type of information involved.
The reference to attributing knowledge by the employment of an agent confirms that merchant status does not always depend on the principal's knowledge. Similarly, an organization is charged with the expertise of its employees and even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or business personnel familiar with business practices.
30. "Non-exclusive license." This is the most common type of commercial license. The licensor grants limited rights and does not foreclose itself from making additional licenses involving the same subject matter and general scope. A non-exclusive license has been described as nothing more than a promise not to sue. While it often has more proactive commercial aspects in modern commerce, a license does not convey property rights to the licensee.
31. "Present value." This definition corresponds to original Section 2A-103 and Section 1-201(37)(z) of the Uniform Commercial Code, but modifies the rules to cover present valuation of performances other than payments.
32. "Published informational content." This term refers to the type of information most closely associated with free expression. In older technology, this is the material of newspapers, books, motion pictures and the like. Just as in that context, in the context of computer information transaction, informational content is within this term when distributed to the public and intended to communicate knowledge, sounds, or other experiences to a human being, rather than simply to operate a machine. The term includes interactive content since, in interactive products, the information is generally available and the end user selects from the available information. That is like the reader of a newspaper who reads part, but not all, of the newspaper.
The term does not include information provided in a special relationship of reliance. That phrase, which is also used in Section 404, has the same meaning in both contexts. It excludes transactions in which the provider knows that the particular licensee plans to rely on the particular data that the licensor provides and expects that the licensor will tailor the information to the particular client's business or personal needs. The relationship arises only with respect to persons who possess unique or specialized expertise or who are in a special position of confidence and trust with the licensee such that reliance is justified and the party has a duty to act with care. In a special relationship of reliance the information provider is specifically aware of and personally tailors information to the needs of the particular licensee as an integral part of the provider's primary business of providing such content. A reliance relationship does not arise for information made generally available to a group in standardized form even if those who receive the information subscribe to an information service they believe relevant to their commercial or personal needs.
33. "Reason to know." This definition is consistent with Restatement (2d) Contracts § 19, comment b. A person has reason to know a fact if the person has information from which a reasonable person of ordinary intelligence would infer that the fact does or will exist based on all the circumstances, including the overall context and ordinary expectations. The party is charged with commercial knowledge of any factors in a particular transaction which in common understanding or ordinary practice are to be expected, including reasonable expectations from usage of trade and course of dealing. If a person has specialized knowledge or superior intelligence, reason to know is determined in light of whether a reasonable person with that knowledge or intelligence would draw the inference that the fact does or will exist. There is also reason to know if from all the circumstances, the inference would be that there is such a substantial chance that the fact does or will exist that, exercising reasonable care with reference to the matter in question, the person would predicate the person's action upon the assumption of its possible existence.
"Reason to know" must be distinguished from knowledge. Knowledge means conscious belief in the truth of a fact. Reason to know need not entail a conscious belief in the existence of the fact or its probable existence in the future. Of course, a person that has knowledge of a fact also has reason to know of its existence. Reason to know is also to be distinguished from "should know." "Should know" imports a duty to others to ascertain facts; the term "reason to know" is used both where the actor has a duty to another and where the person would not be acting adequately in protecting its own interests if it did not act in light of the facts of which it had reason to know.
34. "Receive." This definition, as to performances, corresponds to original Section 2-103 of the Uniform Commercial Code but also covers electronic systems used to give and receive notice. "Receive" includes circumstances in which a message is delivered to a place designated by the recipient even if that place is under the control of a third party. Delivery to a private post office box is receipt by the addressee even though the addressee may not remove or otherwise obtain the message until later. Similarly, receipt of a message at an electronic mail address, even though on a third party system, constitutes receipt as to the ultimate addressee, if that electronic mail address was held out as a place for receipt of such messages. The definition is met only if the person holds out a given location or system as a place for receiving notices of a particular kind and the message is in fact of that kind. For example, outside of electronic commerce, parties frequently require that notice of default or other contractually important events be delivered or sent to a particular address or person. The same is true in electronic commerce. If parties agree to send notice of default or notice of a change in the terms of service to a particular e-mail address, receipt at that location suffices, but delivery to a general e-mail address will not suffice. On the other hand, where there is no specifically agreed location, delivery to a general e-mail address may suffice.
In all cases, the message must be capable of being processed. This refers to processing in the type of system in its general, reasonably expected configuration and not to the details of an atypical configuration known or knowable only to the party operating the system. The message must be capable of interacting with an ordinary system of the particular type.
35. "Record." A record must be in or capable of being converted to a perceivable form. Electronic text recorded in a computer memory that could be printed from that memory constitutes a record. Similarly, a tape recording of an oral conversation or a video taping of actions could be a record. The term does not require permanent storage or anything beyond temporary recordation. Fixation can be fleeting and perception can be either directly or indirectly with the aid of a machine.
36. "Release." A release is a waiver or permission not accompanied by other commercial attributes, such as an on-going obligation to pay or an obligation to provide the means to implement use of the information. A release is a form of a license, but it is characterized by the lack of other commercial attributes. The term is used in this Act to identify a class of transactions in which the sole purpose of the agreement is to permit use and which agreements are often made on a less formal basis than a more typical commercial license.
37. "Return." In this Act, a "return" refers to acts that generally place a party back into their initial position if the party has rejected a record made available to it after having committed to or completed, an obligation, to pay or deliver and as a result of the rejection the transaction will not be carried forward. In traditional commerce, this issue has been most specifically relevant to licensees, but there are many cases where the licensee controls the timing or proposed terms, and the nature of the terms proposed. This will be even more common as electronic commerce makes possible systems by which consumers or other licensees through automated agents can propose terms after the initial agreement in circumstances where this Act recognizes that proposal as part of an on-going contracting process, rather than as a proposal for modification. When this occurs with respect to a licensor, a return requires re-delivery to the licensor of information already delivered that would have been covered by the rejected record. With respect to a licensee, "return" consists of a reimbursement of fees paid on re-delivery of all copies of the information and documentation. In both cases, the information and documentation must be re-delivered in their original condition.
Whether or when a right to a return exists depends on the terms of the offer and this Act. Return is not a remedy for breach or a right of rescission. It is a right that arises if a party refuses a proffered license and it has previously committed to, or paid the contract fee. Making a return available in such cases is essential to allow the party an opportunity to accept or reject that license. See Sections 112 and 112(e). The right to return in those sections expires if the party assents to the license. Of course, if a party accepts a license but the information is defective, the aggrieved party may have a right to restitution of the contract fee as direct damages or might have a contractual right to a return if defined by the agreement.
Return must be sought within a reasonable time. What constitutes a reasonable time depends on the contract or, if the contract is silent, the facts and circumstances of the commercial context.
The definition deals with the difficult problem of administering a return right in "bundled" products (products that include separate items of information transferred as a whole for a single fee). Bundled transactions are not based on a mere sum of the fees required for each product in an unbundled setting and, often, include information products that are provided for no charge, even though the information may have a discernable price in other transactions. If the products are subject to separately priced contract fees, a return is for the contractual fee attributed to the item in question. Otherwise, return must be of the entire bundled product and reimbursement of the entire price. For the former, the price must be separately stated in the sense that the agreement identified an amount allocated to the particular information. A court cannot unbundle the products and estimate appropriate pricing in what is often a complex distribution arrangement premised on the bundling of multiple products.
38. "Scope." This term refers to contract terms that define the central elements of a license. Scope provisions in a license define the product. In sales or leases of goods, products are self-defining: an offered car is either a Ford or Chevrolet, it is not necessary to read a contract to determine that. That is not the case in the computer information industries. The same information has entirely different characteristics depending on the scope of rights granted. For example, a license that allows use of a word processing program in a single computer is not the same product as a license to make and distribute copies of the word processing software throughout the United States. And neither of those licenses is the same as a license that transfers the same product under a license to use a copy for three days in one's home. They are all different even if the software is identical.
39. "Send." This definition adapts original Section 2-201(38) of the Uniform Commercial Code to cover electronic notices. In modern technology sending a message does not require that the information move from one location to another. Electronic transfers more ordinarily involve initiating processes that copy the information into another location or make it available in a system shared or accessible by the recipient and the person or electronic agent creating the message. The message must be capable of being processed by the type of system involved. This refers to the type of system in its general, reasonably expected configuration and not to the details of an atypical system configuration. The message must be capable of interacting with ordinary systems. Of course, if the sender has knowledge of the details of the actual system to which it is sending the message, its actions may need to take that knowledge into account. Use of the phrase "in addition" makes it clear that the electronic sending must also comply with relevant criteria for other media, such as in use of a reasonable carrier. Finally, as with the definition of "receive," the message or item sent must be directed to a location or system that is held out as a place for receiving communications of that kind.
40. "Software contract" includes licenses of software and sales of copies of software. It also covers all software development contracts involving independent contractors, whether or not the contract is a work for hire for purposes of copyright law. Of course, under copyright law, most works for hire are authored by an employee in the scope of its employment. This Act does not deal with employee contracts and thus does not cover a contractual arrangement under which an employee develops software for the employer within the scope of the employee's job.
41. "Standard form." The definition refers to forms, not standard terms. A form consists of record containing a group of terms prepared for frequent use as a group. The definition does not cover a tailored contract comprised of "terms" selected from multiple prior agreements. The overall form must itself have been prepared for repeated use and actually used without negotiation other than of the ordinarily tailored terms noted in the definition. If a standard form is offered but then negotiated or changed other than with respect to those ordinarily tailored terms, the resulting record of the contract is not a standard form.
SECTION 103. SCOPE; EXCLUSIONS; AGREEMENT THAT ACT GOVERNS.
(a) This [Act] applies to computer information transactions.
(b) Except as otherwise provided in subsection (e), if a transaction involves computer information and other subject matter, this [Act] governs the whole contract if the computer information is the primary purpose of the parties in the transaction, but does not govern subject matter excluded under subsection (c) and (d).
(c) The following rules apply between this [Act] and [articles of the Uniform Commercial Code]:
(1) If a transaction involves computer information and goods, as between this [Act] and [Article 2 and Article 2A of the Uniform Commercial Code], this [Act] applies to the computer information and [Article 2 or 2A] do not apply to the computer information. However, if a copy is contained in and sold or leased as part of primary goods, or sold as a replacement for a copy contained in primary goods, this [Act] applies to the copy only if:
(A) the primary goods in which the copy is contained are a computer or computer peripheral; or
(B) giving the buyer or lessee of the primary goods access to or use of the computer information itself is a material purpose of ordinary transactions of the type.
(2) To the extent of a conflict between this [Act] and [Article 9], [Article 9] governs.
(3) This [Act] does not apply to subject matter within the scope of [Article 3, 4, 4A, 5, 6, 7, or 8 of the Uniform Commercial Code].
(d) This [Act] does not apply to:
(1) a financial services transaction;
(2) a contract to create, perform or perform in, include information in, acquire, use, distribute, display, modify, reproduce, license, have access to, adapt, make available, transmit, license, or display:
(A) audio or visual programming that is provided by broadcast, satellite, or cable as defined in the Federal Communications Act as that Act existed on January 1, 1999, or by similar methods of delivering the programming; or
(B) a motion picture, sound recording, musical work, digital musical recording, or phonorecord as defined or used in the federal Copyright Act as of January 1, 1999, or a digital motion picture recording;
(3) a compulsory license; or
(4) a contract of employment of an individual other than as an independent contractor.
(e) Except as otherwise provided in subsection (c)(2), if the subject matter of a transaction includes information, parties may agree that this [Act], including contract formation rules, governs the transaction in whole or in part or that other law governs the transaction and this [Act] does not apply. The agreement is subject to the following rules:
(1) An agreement that this [Act] governs a transaction does not alter an otherwise applicable rule that may not be varied by agreement and, in a mass-market transaction, does not alter:
(A) the applicability of a consumer protection statute or administrative rule; and
(B) law applicable to a tangible copy of information in print form.
(2) An agreement that this [Act] does not govern a transaction does not alter the applicability of Section 217 or 816 and, in a mass-market transaction, does not alter the applicability of unconscionability, fundamental public policy, or good faith under this [Act].
Definitional References: Section 102: "Agreement"; "Consumer"; "Computer"; "Computer information"; "Computer information transaction"; "Consumer"; "Copy"; "Electronic"; "Financial services transaction"; "Good faith"; "Individual"; "Information"; "License"; "Mass-market transaction"; "Party".
1. General Structure. This section states the scope of this Act and exclusions from that scope.
2. Transactions in Computer Information. "Computer information transactions" are agreements. This Act does not deal with property rights in information. As indicated in Section 102(a)(12), computer information transactions whose primary purpose of which entails the creation, modification or distribution of computer information. "Computer information" is information in a form directly capable of being processed by, or obtained from, a computer, but the term also includes a copy of information in that form and any associated documentation or packaging. Section 102(a)(11).
Transactions in computer information focus on the computer information, rather than tangible media that contains the information (goods). The transferee seeks the information and contractual rights to use it. Unlike a buyer of goods, the purchaser (e.g., buyer, lessee, or licensee) of a copy of computer information has little interest in the original diskette, CD or tape that contained the information unless the computer information remains on that media and nowhere else. More often, a purchaser copies the information into a computer, reads or prints it from a computer display, or transmits it from one computer to another location, in all cases rendering the original media (if any) largely immaterial. As computer technology increasingly shifts to purely computerized use and distribution, in many cases there is no tangible media involved at all.
The scope of this Act turns on the definition of "computer information transaction." For a transaction to be included, acquiring the computer information, access to it, or its use must be a focus of the transaction and not a mere incident of another transaction. Typically, for covered transactions, the contract is for the creation, use or distribution of the computer information itself. This Act includes a license allowing a company to transform photographs into digital form for re-licensing to others. It also includes a contract to compile in digital form a database of names for use as a product furnished as a mailing list.
The mere fact that information related to a transaction is sent or recorded in digital form is not sufficient. Thus, a contract for airplane transportation is not a transaction within this Act simply because the ticket is in digital form. The subject matter is not the computer information, but the service - air transportation from one location to another. Similarly, an insurance policy prepared in digital form is not a computer information transaction, but a contract for insurance whose result or terms is 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. This Act does not apply to the many cases in which a person provides information to another person for purposes of another transaction such as making an employment or loan application.
a. Software Creation, Development and Support. This Act applies to contracts for the development or creation of computer information, such as software development contracts and contracts to create a computer database. Contracts of this type had been subject to inconsistent court rulings, applying sale of goods or common law theories based on unclear distinctions. This Act covers all such transactions. The Act does not, however, cover contracts for development or creation of motion pictures, sound recordings, or broadcast programs. These are excluded by subsection (d). This Act also does not cover contracts to create print books or articles.
b. Computer Programs. This Act also applies to transactions involving the distribution of, or grant of a right to use, a computer program. These transactions are covered whether they involve a license or a sale of a copy. The difference between a license and an unrestricted sale of a copy, however, is relevant within this Act in that, as reflected in the Act, a license often involves a more substantial retention of rights by the copyright owner. In this Act, some provisions apply to all computer information transactions (unrestricted sales or licenses), while others are limited to licenses. Under copyright law, an unrestricted sale of a copy gives the buyer of the copy rights to use as may be permitted in 17 U.S.C. § 117. Ownership of a copy, however, does not under copyright law grant the right to make copies for distribution, to make multiple copies for simultaneous use, to rent a copy, or to publicly display it. A license can either reduce or increase those rights and, in some cases, may preclude a transfer of ownership of the copy.
c. Access and Internet Contracts. This Act covers transactions involving access to or information from a computer system. This covers Internet and similar systems for access to or use of computer information. On-line information distribution is the single major new development in commerce in the last portion of the twentieth century. As defined here, however, it does not include broadcast or similar distribution of programming, or distribution of digital motion pictures, sound recordings or the like and should not be applied by analogy to such transactions.
3. Transactions outside the Act. This Act leaves unaffected all transactions in the core businesses of other information industries (e.g., print, motion picture, broadcast, sound recordings) whose commercial practices in their traditional businesses differ from those in computer software, online and data industries. This Act does not apply to print industries. Whether a magazine (book or newspaper) publisher can contractually limit purchasers of copies and what contract liability applies to works distributed in that form is not addressed in this Act.
The scope of this Act is limited by the subsection (a) and exclusions in subsection (d). These place the following outside this Act::
• Sales or leases of goods.
• Casual of incidental exchanges of information.
• Employment contracts.
• Computers, televisions, VCR's, DVD players, or similar goods.
• Print books, magazines, or newspapers.
• Motion pictures, sound recordings, musical works.
• Broadcast or cable programs.
This Act does not apply to "information", but to transactions (agreements) focused on information.
4. Mixed Transactions. As with transactions in goods, computer information transactions may present questions about to what extent a transaction is governed by this Act, common law, or goods-based law in Articles 2 or 2A of the Uniform Commercial Code. In modern commerce, virtually all contracts are governed by multiple sources of contract law. Thus, the consequences of a contract to produce a motion picture or distribute it are governed by Article 2 of the Uniform Commercial Code, common law, labor law, and copyright law. The sale of a book are governed in part by Article 2 of the Uniform Commercial Code, consumer law, common law, and copyright law. This Act provides clarity on the issues it addresses, but is supplemented by federal law (including copyright), consumer law, and common law.
All contracts involve "mixed" law. The scope issue is not whether multiple sources of contract law apply (they always apply), but to what extent this Act supplants another source of law. This Act tailors the answer to several factors: the issue disputed, the particular context of the transaction, and the commercial policies that are applicable.
a. Computer Information and Goods. "Goods" governed by Article 2 of the Uniform Commercial Code are not "computer information," nor is computer information goods. Properly applied, then, there is no overlap between goods-based statutes and this Act. Subject matter governed by this Act is not within the scope of goods-based statutes. In most cases, if goods and computer information are in a transaction, good-based rules apply to the goods, but this Act applies to the computer information. Some courts describe this as the "gravaman of the action" standard. Law applicable to any part of a transaction depends on whether the issue pertains to the goods or to the computer information. Each governs its own subject matter. When both are in the same transaction, each applies to its own subject matter.
There are two exceptions. First, because computer information may be transferred on tangible media, which may be goods, there is a question about what law applies to the plastic diskette or other media.. When the media is the carrier of computer information, it is within this Act. This Act applies to goods that are a copy, documentation, or packaging of the computer information. See Section 102. These are incidents of the transfer of computer information. This Act covers both the software and the media on which the software is copied or documented.
Second, in some cases, computer information is so embedded in and sold or leased as part of goods that the computer information is merely incidental to the goods. These cases are a narrow exception to the gravaman of the action test under this Act with respect to goods. See Section 102 (definition of computer information). If the computer information is embedded in and inseparable from goods that are sold as goods, whether this Act applies to the copy of computer information I determined by two rules contained in the definition of "computer information":
• This Act applies to the computer information if the goods in which the information is embedded are a computer or a computer peripheral. The computer or peripheral often cannot function without the computer information (computer program). The computer information itself is per se important to the entire transaction.
• In other cases of embedded information, this Act does not apply to the information unless giving the purchaser the attributes of the computer information is a "material purpose" of the transaction. Materiality is clear if the computer information is separately licensed. When that occurs, other (goods-based) law governs the goods, but this Act governs the computer information.
Factors suggesting that the program's processing capacity is a material focus of the transaction include the extent to which the processing capabilities of the software is the dominant appeal of the product, the extent to which negotiation of the parties focused on that processing capacity, and the extent to which the agreement otherwise makes the processing capabilities a separate focus for agreed terms. Thus, while selecting channels on a television may be controlled by a computer program, the purpose of buying an ordinary television is to acquire the television and its reception. The sale of an ordinary television containing a computer program today is not in this Act. Similarly, some automobile functions may be operated by a computer program, the car rather than the program that operates the brakes is the primary purpose of the transaction. On the other hand, upstream development or supply contracts for the program are within this Act. Separately licensed software for a digital camera that enables the camera to be linked to a computer is within this Act.
b. Computer Information and other UCC Articles. The articles of the U.C.C. control aspects of a transaction applicable to their own subject matter. That principle is preserved in subsection (c)(3). Article 8, and not this Act, deals with investment securities and rights or remedies with respect to that subject matter. The same applies with respect to Article 4 and Article 4A: payment systems, checks, and funds transfers. Similarly, under subsection (c)(2), if a provision of Article 9 conflicts with this Act, Article 9 controls.
c. Computer Information and Other Contract Law. When questions about scope do not involve goods or other subject matter of the articles of the U.C.C., but do involve subject matter under this Act and other subject matter, courts should follow general interpretation principles to determine the extent of applicability of this Act. In most cases, this will entail application of a "primary purpose" test judged as of the time of the contracting.
If computer information is the primary ("predominant") purpose of a transaction, the rules of this Act apply, rather that common law except as to subject matter excluded by subsection (e) or covered by subsection (c)(1). The predominant purpose test has been applied for years by courts dealing with Article 2 where goods and services are involved. The test asks whether the subject matter of this Act (computer information) or other subject matter (services) is the focus of the contract. If it is, this Act governs the aspects related to computer information and the other subject matter. If not, common law governs as to the other subject matter. Thus, in a contract between an author and a publisher, the agreement is outside this Act if the predominant purpose is to give the publisher the right of publication in book (printed) form or the right to motion picture use. The fact that information intended for redistribution in print form is delivered or to be delivered in electronic form does not make computer information the primary purpose of the transaction. If for both parties the intended primary use of the work is in print or motion picture form, the transaction is outside this Act. Given that primary purpose, the mere fact that "electronic rights" are also covered, does not place the transaction in this Act under a primary purpose test. Similarly, a contract with a producer whose predominant purpose is to develop a motion picture for distribution as such does not come within this Act. On the other hand, a contract giving a software publisher the right to reproduce a photographic image in "software and other works" is governed by this Act if the predominant purpose is to allow use in computer information even though use in print form is also permitted. Similarly, a license to acquire rights to use software by a motion picture studio which may use the software as a tool in creating motion pictures is a computer information transaction, while a license to use digital scenes or images in a motion picture is excluded.
The predominant purpose test requires consideration of the type of transaction envisioned by the parties. For example, in a loan transaction, the loan officer might deliver a diskette containing interest rate calculations to the borrower. While the diskette is computer information, under the primary purpose test, no part of the transaction is covered by this Act. The predominant purpose of the agreement is a loan. This approach is more appropriate than that of some courts which, under prior law, applied sale of goods rules to software development transactions because, even though the contract concerned software services, the program was delivered on a diskette or tape. The proper analysis there is not whether in some way this is a sale of goods, but whether common law or the principles of Article 2 (e.g., damage rules, tender rules, rules on timing of ownership, duration of license, effect of negligence, etc.) fit the transaction in fact better. A more nuanced analysis is appropriate for new technology, especially in light of the enactment of this Act
While the cases under Article 2 provide some guidance about the scope of statutory and common law, it is appropriate to consider additional factors when this Act is contracted to common law. Courts should consider the extent to which the transaction as a whole corresponds to the framework involved in computer information transactions. If it does, this Act should apply to the entire transaction. Among the transactional factors that courts should consider are: (1) the nature of the underlying intellectual property rights involved, including differences in the rights provided under the Copyright Act for different types of works, (2) the extent to which regulatory rules apply to the subject matter, and (3) the extent to which allocation of liability risk is a concern.
The same test applies at various levels of use or distribution, but the results of the test may differ at each level. For example, a courier company that licenses communications software from a software publisher is engaged in an transaction within this Act. The subject matter of the agreement is a license of the software. If the courier company provides the software to customers to access data on the location of packages, the purpose may be the services that the courier provides. Even is such case, however, if the software publisher enters into a license with the end user, that license is within this Act.
The predominant purpose test applies only if the parties do not otherwise agree. In the foregoing, for example, if the parties elect coverage under this Act, that agreement governs as would an agreement that this Act should not apply at all. The issue is whether this Act supplants common law, leaving intact in any case, the rules of Article 2 and federal law. Agreement here, as elsewhere in the U.C.C., can be found in the express terms of the contract as well as in the usage of trade or course of dealing between the parties, or as inferred from the circumstances of the contracting. In any event, coverage or non-coverage by this Act does not create "mixed contracts." They exist with or without this Act.
5. Exclusions. Subsection (d) states several exclusions from this Act. These exclusions are based on a conclusion that the rules in this Act should not be applicable to the excluded subject matter unless the parties agree to do so because the excluded transactions are different in type than included transactions. Ordinarily, a court should not apply this Act by analogy to excluded subject matter, but should refer to other law, including Article 2 and Article 2A of the Uniform Commercial Code.
a. Core Financial Functions. Subsection (d)(1) excludes core banking, payment and financial services activities. This subsection does not exclude banks or financial institutions. Modern technology and developments in digital cash and similar systems place many companies other than banks in direct competition. Regulations, such as federal Regulation E on funds transfer, do not apply solely to banks, but to any holder of a qualifying account. To the extent that non-banks engage in the activities indicated in the exclusion, those activities are also excluded from this Act. Modern banks engage in many activities identical to licensing, however. The on-line systems are within Act to the extent that they involve activities such as on-line shopping, database access, and other activities not within the exclusion. As the information industries converge, so too is the banking industry converging into information industries. The resulting non-financial transactions are covered by this Act.
b. Core Entertainment and Broadcast. Subsection (d)(2) excludes agreements relating to motion pictures, musical works, sound recordings, as well as broadcast and cable programming. The exclusion covers the core activities of traditional industries. It reflects the existence of a regulatory overlay for some (cable and broadcast) and the different nature of transactional, liability and other issues in these industries as contrasted to software and data industries. Also, underlying property rights may differ (e.g., in copyright law, a first sale of a computer program or video game does not give the buyer a right to rent the copy to a third party). Overall, the differences lead to different transactional formats and participants in those industries believe that the general principle in this Act should not apply to them.
The exclusion here of motion pictures, sound recordings, and the listed broadcast or cable activities leaves liability and other issues to general law, including when appropriate, Article 2 or Article 2A of the Uniform Commercial Code. Because these transactions differ from in this Act, the principles set out in this Act should not be applied to transactions in these traditional areas of practice.
The terms "motion picture", "sound recording", "musical work", "digital sound recording" and "phonorecord" have the meanings associated with these terms in the Copyright Act as of the indicated date. The Copyright Act and the registration system it enacts makes distinctions among and between various types of works, such as audiovisual works generally, video games, literary works, computer programs, and motion pictures and sound recordings on the other. These distinctions are part of accepted industry practice and are followed here.
The term, motion picture, includes traditional motion pictures regardless of how distributed, e.g., it includes digital video disk distribution of motion pictures for home or other viewing, even though these are digital works and may be distributed in a form that includes in the disk a computer program designed solely to enable display or performance of the motion picture. These digital products are not governed by this Act. Either Article 2 or Article 2A, along with common law apply. The term "motion picture" does not include an interactive computer game, multimedia product, or similar work, nor does it include audio visual effects included in such interactive works. The term refers to the work as a whole and does not include images or visual motion within another work or software, such as the animated help feature of a word processing program or images or sequences of motion in an interactive computer encyclopedia.
Subsection (d)(2) excludes contracts for audio and visual programming distributed by broadcast, cable, or satellite. This excludes traditional broadcast and cable services, regardless of whether transmitted in digital or another form, including to exclude transmissions analogous to broadcast but made through the Internet. The federal Communications Act, 47 U.S.C. § 522, defines "video programming" as "programming provided by, or generally considered comparable to programming provided by, a television broadcast station." Audio programming refers to audio programming comparable to radio broadcasts. "Broadcast" and "cable" systems are defined in the Communications Act. Satellite transmission refers to satellite broadcast or cable. See 47 U.S.C. § 548.
6. Contract Choice. Subsection (e) adopts the basic rule that contract choices control. Parties can agree to have this Act apply to the entire transaction, part of the transaction, or none of the transaction. These choices, of course, deal with applicability of this Act and not with other law, including not with other law that in event supplements this Act. Agreed choices are effective irrespective of the "primary purpose" of the transaction. An agreement to opt into or out of coverage renders the "primary purpose" test moot.
In determining whether an agreement to opt-in or opt-out of coverage of this Act was formed, a court will ordinarily apply the contract formation rules of this Act. This is especially true if the transaction involves subject matter governed by this Act. In this regard, agreement can be found in the express terms of the contract of the parties as in course of dealing, usage of trade, or as inferred from the circumstances.
For commercial parties, the ability to choose to be governed by this Act or by other contract law gives an important opportunity to avoid uncertainty and to avoid potentially conflicting rules potentially applicable under multiple bodies of state contract law (e.g., this Act, Article 2, Article 2A, and common law). This is important. This Act does not apply to all transactions in information. On the other hand, in some contexts, there is a public interest to prevent over-reaching on issues that otherwise cannot be varied by agreement. This interest, of course, does not validly apply to contract rules that can be varied by agreement. The provisions of subsection (e) balance the interests.
SECTION 104. SUPPLEMENTAL PRINCIPLES: COMMERCIAL PRACTICE; VARIATION BY AGREEMENT; GOOD FAITH; DECISION FOR COURT.
(a) 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, fraud, misrepresentation, duress, coercion, mistake, other validating or invalidating cause, shall supplement the provisions of this [Act]. Among the laws supplementing and not displaced by this [Act] are trade secret laws and unfair competition laws.
(b) Any usage of trade in the business, trade, or industry in which the parties are engaged or of which they are or should be aware, along with any course of dealing or course of performance between parties are relevant to determining the existence or meaning of an agreement.
(c) 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. However, the following rules apply:
(1) Obligations of good faith, diligence, reasonableness and care established by this [Act] may not be disclaimed by agreement, but the parties may by agreement determine the standards by which the performance of the obligation is to be measured if the standards are not manifestly unreasonable.
(2) Unconscionability under Section 111 and fundamental public policy as stated in Section 105(b) may not be varied by agreement.
(3) 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) limitations on agreed choice of law in Section 109(a);
(B) limitations on agreed choice of forum in Section 110;
(C) limitations in Section 201;
(D) limitations on a mass-market license in Section 211;
(E) requirements and return rights for manifest assent and opportunity to review in Section 112;
(F) the consumer defense arising from an electronic error in Section 217;
(G) requirements for an enforceable term in Sections 303(b), 307(g), 406(b)(c), and 804(a);
(H) restrictions on altering the period of limitations in Section 805(a).
(I) limitations on self-help repossession in Sections 815(b) and 816.
(d) Every contract or duty within this [Act] imposes an obligation of good faith in its performance or enforcement.
(e) Whether a term is conspicuous or is unenforceable under Section 105(a) or (b) or 211(a) is a question to be determined by the court.
1. Basic Principles. This section sets out various basic principles of contract law that are followed by and information decisions under this Act. The two major principles are that contract must be interpreted in light of their practical context, including consideration of trade use, course of dealing and the like. The second follows the fundamental policy of United States law which holds that freedom of contract governs. Agreed choice control unless fundamental, over-riding policy considerations mandate restraints as stated in this Act, such as in the doctrine of unconscionability. As indicated in Section 102, "agreement" can be found in express terms, but also from trade use, course of dealing and course of performance, or inferred from the context.
2. Supplemental Rules. Subsection (a) follow original Article of the Uniform Commercial Code. There are many contract and information-related issues with which this Act does not deal. Subsection (c) makes plain that supplemental provisions of law and equity remain relevant to address those issues. Supplementation, of course, does not imply over-riding the rules of this Act.
3. Trade use, etc. Subsection (b) follows a basic principle articulated in the Uniform Commercial Code which requires that agreements be considered in light of the commercial context. In some cases, this will indicate that a tentative understanding is not considered a binding contract, while in others a different inference may be reached. Similarly, the meaning of the terms of any agreement must be viewed in light of practical considerations. See Section 102 (definition of agreement). This means simply that abstract conceptions about what an agreement should mean are not as important as are grounded interpretations of what an agreement does mean in it practical context.
4. Contract Choice. Subsection (c) states the basic premise that freedom of contract governs under this Act. The "effect" of all provisions of this Act may be varied by "agreement" unless otherwise clear and expressly stated as non-variable. The meaning of the statute is in its text, but an agreement can change the legal consequences which would otherwise follow between the parties to the agreement. An "agreement" does not require a formal writing. It includes the bargain of the parties in fact; an agreement altering the effect of a section may be as easily found in express terms of the contract as in course of dealing, course of performance, or usage of trade or inferred from the circumstances of the transaction. Section 102.
Subsection (c) lists the few cases in which, under this Act, a rule over0rides agreement. With these limited exceptions, all rules in this Act are "default" or "gap-filler" rules which apply only in the absence of contrary agreement. Freedom of contract is especially important in a of converging industries and richly diverse commercial practice. The exceptions should not be sparingly applied. For example, subsection (c)(3)(E) prohibits contractual changes to the definitions of manifest assent and opportunity to review. Obviously, that prohibition is designed as a protection to persons who manifest assent. However, parties are free to agree for greater protections when they so desire and, in appropriate cases, to provide lesser assent standards under an agreement with respect to future transactions as indicated in the section on manifesting assent.
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. In some situations, however, this Act expressly imposes a requirement such as that the term be conspicuousness or that there be manifested assent to the term. The underlying premise is that such requirements exist only if made express in this Act or in requirements that might arise under consumer protection statutes.
5. Good Faith. Subsection (d) follows original Article 1 of the Uniform Commercial Code. Good faith is a relevant aspect of all commercial contract relationships. The standard of good faith here is as described in Section 102. The obligation stated in subsection (d) pertains to enforcement or performance of a contract. It does not create a separate right of action for breach of good faith, either under this Act or under general law.
6. Issues as a Matter for the Court. Subsection (e) follows original Article 2 of the U.C.C. and common law in what issues are reserved for decision by a court. Other issues are also made questions for the court. These are indicated in the relevant section or in applicable case or procedural rules.
SECTION 105. RELATION TO FEDERAL LAW; TRANSACTIONS SUBJECT TO OTHER STATE LAW.
(a) A provision of this [Act] which is preempted by federal law is unenforceable to the extent of the preemption.
(b) If a term of a contract violates a fundamental public policy, the court may refuse to enforce the contract, may enforce the remainder of the contract without the impermissible term, or so limit the application of the impermissible term as to avoid any result contrary to public policy, in each case, to the extent that the interest in enforcement is clearly outweighed by a public policy against enforcement of the term.
(c) Except as otherwise provided in subsection (d), if this [Act] conflicts with a consumer protection statute or administrative rule of this State in effect on the effective date of this Act, the conflicting statute or rule governs.
(d) If the law of this State in effect on the effective date of this [Act] applies to a transaction governed by this [Act], the following rules apply:
(1) A requirement that a term, waiver, notice, or disclaimer be in a writing is satisfied by a record.
(2) A requirement that a writing or a term be signed is satisfied by an authentication.
(3) A requirement that a term be conspicuous or the like is satisfied by a term that is conspicuous in accordance with this [Act].
(4) A requirement of consent or agreement to a term is satisfied by an action that manifests assent to a term in accordance with this [Act].
(e) Failure to comply with a law or policy referred to in this section has only the effect specified in the law or policy.
Legislative Note: Each State should review the statutes that may be affected by subsection (d) to determine whether under their fundamental policy the effect should not apply to some of those statutes. If any, the State should exclude such statutes from subsection (d).
Uniform Law Source: Uniform Commercial Code: Sections 9-104(1)(a); 2A-104(1)
Definitional References: Section 102: "Agreement"; "Authenticate"; "Conspicuous"; "Consumer"; "Electronic"; "Information"; "Informational Rights"; "Record"; "Term".
1. General Principle and Scope of the Section. Subsections (a) and (b) clarify that this Act does not displace or alter the relationship between contract law and intellectual property, competition or trade regulation law. Subsection (c) states a similar principle for consumer protection statutes subject to the limited electronic commerce rules in subsection (d).
The transition from print to digital media has created new demands for information. Because digital information is so easily copied, increased attention has been focused on the formulation of rights in information in order to encourage its creation and on the development of contracting methods that enable effective development and efficient marketing of information assets. Here, as in other parts of the economy, the fundamental policy of contract law is to enforce contractual agreements. At the same time, there remains a fundamental public interest in assuring that information in the public domain is free for all to use from the public domain and to provide for access to information for public purposes such as education, research, and fair comment. While the new digital environment increases the risk of unfair copying, the enforcement of contracts that permit owners to limit the use of information and the development of technological self-help measures have given the owner of information considerable means of enforcing exclusivity in the information they produce or collect. This is true not only against those in contractual privity with the owner, but also in some contexts against the world-at-large.
The effort to balance the rights of owners of information against the claims of those who want access is very complex and has been the subject of considerable controversy and negotiation at both the federal level and internationally. The extent to which the resolution of these issues at the federal level ought to preempt state law is beyond the scope of this Act, the central purpose of which is to facilitate private transactions in information. Moreover, it is clear that limitations on the information rights of owners that may be imposed in a copyright regime where rights are conferred that bind third parties, may be inappropriate in a contractual setting where courts should be reluctant to set aside terms of a contract. Subsections (a) and (b) draw the balance between fundamental interests in contract freedom and fundamental public policies such as those regarding innovation, competition, and free expression.
2. Federal Law: Preemption. Subsection (a) restates a rule that would otherwise be applicable in any event. If federal law invalidates a state contract law or contract term in a particular setting, federal law controls. See, e.g., Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996) (patent license not transferable); Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright license not transferable); Rano v. Sipa Press, Inc., 987 F2d 580 (9th Cir. 1993) (copyright preempts rule on licenses terminable at will); SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9th Cir. 1989) (federal policy controls over state contract law interpretation rules; interpretation must protect the rights-holder). Subsection (a) refers to preemptive federal rules, but other doctrines grounded in First Amendment, copyright misuse and other federal law may limit enforcement of some contract terms in some cases. In general, however, except for federal rules that directly regulate specific contract terms, no general preemption of contracting arises under copyright or patent law. See National Car Rental System, Inc. v. Computer Associates Int'l, Inc., 991 F2d 426 (8th Cir. 1993); ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). No effort is made in this Act to define whether or to what extent such a preemption may arise.
3. Public Policy Invalidation. Contract terms may be unenforceable because of federal preemption under subsection (a) of this section or because the term is unconscionable under Section 111. In addition, subsection (b) acknowledges the general legal principle that, in certain limited circumstances, terms may be unenforceable because they violate a fundamental public policy that clearly overrides the policy favoring enforcement of private transactions as between the parties. The principle that courts may invalidate a term of a contract on public policy grounds is recognized at common law and in the Restatement (Second) of Contracts § 178 et. seq. It is a supplementary legal principle incorporated under Section 1-103 and applies to all contract law and all articles of this Code. Subsection (b) is designed to clarify the nature of the policies that have particular relevance to the subject matter governed by this Act.
Fundamental state policies are most commonly stated by the legislature. In the absence of a legislative declaration of a particular policy, courts should be reluctant to override a contract term. In evaluating a claim that a term violates this subsection, courts should consider a variety of factors including the extent to which enforcement or invalidation of the term will adversely affect the interests of each party to the transaction or the public, the interest in protecting expectations arising from the contract, the purpose of the challenged term, the extent to which enforcement or invalidation will adversely affect other fundamental public interests, the strength and consistency of judicial decisions applying similar policies in similar contexts, the nature of any express legislative or regulatory policies, and the values of certainty of enforcement and uniformity in interpreting contractual provisions. Where the parties have negotiated terms of their agreement courts will be even more reluctant to set aside terms of the contract. In light of the national and international integration of the digital environment, courts should be reluctant to invalidate terms based on purely local policies. In applying these , courts should consider the position taken in the Restatement (Second) of Contracts § 178, comment b ("In doubtful cases . . . a decision as to enforceability is reached only after a careful balancing, in light of the circumstances, of the interests in the enforcement of the particular promise against the policy against the enforcement of such terms. . . . Enforcement will be denied only if the factors that argue against enforcement clearly outweigh the law's traditional interest in protecting the expectations of the parties, its abhorrence of any unjust enrichment, and any public interest in enforcement of the particular term.").
The public policies most likely to be applicable to transactions within this Act are those relating to innovation, competition, and fair comment. Innovation policy recognizes the need for a balance between conferring property interests in information in order to create incentives for creation and the importance of a rich public domain upon which most innovation ultimately depends. Competition policy prevents unreasonable restraints on publicly available information in order to protect competition. Rights of free expression may include the right of persons to comment, whether positively or negatively, on the character or quality of information in the marketplace.
In practice, enforcing private contracts is most often consistent with these policies, largely because contracts reflect a purchased allocation of risks and benefits and define the commercial marketplace in which much information is disseminated and acquired. Thus, a wide variety of contract terms restricting the use of information by one of the contracting parties present no significant concerns. For example, contract restrictions on libelous or obscene language in an on-line chat room promote interests in free expression and association and such restrictions are enforced to a much broader degree arising out of contractual arrangements than if imposed by governmental regulation. However, there remains the possibility that contractual terms, particularly those arising from a context without negotiation may be impermissible if they violate fundamental public policy.
Contracting parties may have greater freedom contractually to restrict the use of confidential information than information that is otherwise publicly available. While a term that prohibits a person from criticizing the quality of software may raise public policy concerns if included in a shrink-wrap license for software distributed in the mass-market, a similar provision included in an agreement between a developer and a company applicable to experimental or early version software not yet perfected for the marketplace would not raise similar concerns. Trade secret law allows information to be transferred subject to considerable contractual limitations on disclosure which facilitates the exploitation and commercial application of new technology. On the other hand, trade secret law does not prohibit reverse engineering of lawfully acquired goods available on the open market. Striking the appropriate balance depends on a variety of contextual factors that can only be assessed on a case-by-case basis with an eye to national policies.
A term or contract that results from an agreement between commercial parties should be presumed to be valid and a heavy burden of proof should be imposed on the party seeking to escape the terms of the agreement under subsection (b). This Act and general contract law recognizes the commercial necessity of also enforcing mass market transactions that involve the use of standard form agreements. The terms of such forms may not be available to the licensee prior to the payment of the price and typically are not subject to affirmative negotiations. In such circumstances, courts must be more vigilant in assuring that limitations on use of the informational subject matter of the license are not invalid under fundamental public policy.
Even in mass market transactions, however, limitations in a license for software or other information such as terms that prohibit the licensee from making multiple copies, or that prohibit the licensee or others from using the information for commercial purposes, or that limit the number of users authorized to access the information, or that prohibit the modification of software or informational content without the licensor's permission are typically enforceable. See, e.g., Storm Impact, Inc. v. Software of the Month Club, 1998 WL 456572 (N.D. Ill. 1998) ("no commercial use" restriction in an on-line contract). On the other hand, terms in a mass-market license that prohibit persons from observing the visible operations or visible characteristics of software and using the observations to develop non-infringing commercial products, that prohibit quotation of limited material for education or criticism purposes, or that preclude a non-profit library licensee from making an archival copy would ordinarily be invalid in the absence of a showing of significant commercial need.
Under the general principle in subsection (b), courts also may look to federal copyright and patent laws for guidance on what types of limitations on the rights of owners of information ordinarily seem appropriate, recognizing, however, that private parties ordinarily have sound commercial reasons for contracting for limitations on use and that enforcing private ordering arrangements in itself reflects a fundamental public policy enacted throughout the Uniform Commercial Code and common law.
In part because of the transformations caused by digital information, many areas of public information policy are in flux and subject to extensive debate. In several instances these debates are conducted within the domain of copyright or patent laws, such as whether copying a copyrighted work for purposes of reverse engineering is an infringement. This Act does not address these issues of national policy, but how they are resolved may be instructive to courts in applying this subsection. The most recent national statement of policy on the relationship between reverse engineering and copyright in digital information creates an express treatment of reverse engineering in connection with circumventing technological measures that limit access to copyrighted works. It recognizes a policy to not prohibit some instances of reverse engineering in cases 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.").
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. State Law: Consumer Law. This Act does not alter substantive provisions of state consumer protection statutes. This recognizes the role of independent and divergent state consumer protection statutes in the fifty States. This Act deals with general contract law and commercial contract law principles. It does not promulgate a consumer protection code, although this Act does contain certain new consumer protections. Historically, consumer protection issues have been resolved on a state-by-state basis. These statutes reflect extensive policy review about the relationship between protection and contract freedom in each State. This Act, as a general commercial statute, does not override these judgments. With the exception of the procedural electronic commerce rules in subsection (d), a State's consumer protection statutes or regulations trump the general contract law of this Act. Thus, for example, a consumer protection statute that mandates disclosure of local service outlets or the location of the licensor's main business office in a consumer contract is not affected by this Act.
In addition, this Act contains a number of consumer protection rules for consumer contracts within this Act or under the more general reference to mass-market licenses, a category that includes all consumer contracts. These rules augment existing consumer protection statutes and the existing protections control to the extent of any conflict. A conflict, for this purpose, would occur if a rule in this Act provides less protection for the consumer than does the consumer protection statute. The provisions of this Act in many cases provide consumer protections that go beyond original commercial contract law as stated in Article 2 of the Uniform Commercial Code or general common law and restate protections under original Article 2. The consumer-related rules include: 109 (choice of law); 217 (electronic error); 211 (limit on mass-market license; right to return); 303 (limit on no-oral modification clause); 304 (limit on modification of continuing contract); 406 (warranty disclaimer); 409 (third-party beneficiary); 704 (perfect tender); 803 (exclusion of personal injury claim); 811 (limitation on agreement to specific performance remedy).
5. State Law: Electronic Commerce Issues. Subsection (d) states a significant electronic commerce rule to enable uniform procedures for electronic commerce. It provides for limited displacement of state law requiring a "writing" or a "signature," shifting those requirements to standards consistent with the electronic commerce treatment in this Act. This parallels the treatment of this issue in digital signature laws. See, e.g., RCW 19.34.300(1) (signature); RCW 19.34.320 (writing). This rule is appropriate and necessary to achieve the substantial cost savings and expanded access to information that electronic commerce offers, which benefit consumers as well as other entities.
Subsection (d) allows electronic records to suffice for a required writing. This assumes, of course, that the form and presentation of the record otherwise meets the substantive requirements of the relevant consumer statute. In some cases, such statutes require that the consumer be able to retain the writing; this subsection would not alter that retention requirement. Similarly, in some consumer statutes requiring a writing, the expectation is that the consumer will actually see the terms of the record. Subsection (d) does not alter that rule; the record that substitutes for a writing in such case must be adequate to meet the underlying consumer protection requirements. Similarly, an authentication satisfies requirements of a signature if given for the purposes associated with the requirements of the other law.
For computer information transactions, the rules of this Act supplant other law as to contractual issues and the rule stated in this section merely reflects that principle. For consumer transactions, however, substantive contract-related rules are preserved. The four stated electronic commerce issues selectively replace limited procedural rules to balance the benefits of modernization and uniformity with retention of other consumer rules. This limited approach does not alter the other substantive terms of the other laws.
A number of States have adopted digital or electronic signature legislation. Those statutes are not displaced by this Act. A digital signature that is effective under such state legislation is enforceable and effective in computer information transactions under this Act. This is made explicit in Section 215. On the other hand, unless the state law indicates otherwise, a signature that does not conform to the provisions of a digital signature statute might nonetheless satisfy the conditions for an authentication under this Act.
6. State Law: Computer Viruses. This Act does not deal with computer viruses and does not alter existing criminal or other law on that subject. In general, a "virus" consists of computer code put into a software or other system with the intended effect of disrupting the system or altering or destroying information in that system. Law in most States and federal law makes the knowing or intentional introduction of a computer virus a criminal act. See Raymond Nimmer, Information Law ¶ 9.04 (1997). Most state law concerning viruses falls under criminal law. As this indicates, most virus risks result from acts of third parties not in a contractual relationship with the victim. Acts that cause losses from a computer virus might also create liability in tort in appropriate cases. While few civil actions have been brought, the liability of the wrongdoer involves issues other than under contract law.
As to contractual issues, virus problems typically arise between two, ordinarily innocent, contracting parties. In licensing law, they may be handled as any other contract risk. A virus may cause the information to fail to perform. The remedy in contract is determined by the general rules of this Act or the agreement. Absent agreement, no clear basis for allocating the risk under contract principles is manifest and this Act leaves the allocation of risk to other law.
SECTION 106. RULES OF CONSTRUCTION. In applying this [Act], the following rules of construction apply:
(1) This [Act] shall be liberally construed and applied to promote its underlying purposes and policies, which underlying purposes and policies are to:
(A) support and facilitate the realization of the full potential of computer information transactions in cyberspace;
(B) clarify the law governing computer information transactions;
(C) enable expanding commercial practice in computer information transactions by commercial usage and agreement of the parties; and
(D) make the law uniform among the various jurisdictions.
(2) Except as otherwise provided in Section 104(d)(3), 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.
(3) 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.
(4) To be enforceable, a term need not be conspicuous, negotiated, or expressly assented or agreed to, unless this [Act] expressly so requires.
(5) Words in the singular include the plural, and in the plural include the singular.
(6) If any provision of this [Act] or application thereof is held invalid, such invalidity shall not affect other provisions or applications of this [Act] which can be given effect without the invalid provision or application, and to this end, the provisions of this [Act] are to be treated as severable.
Definitional References: Section 102: "Agreement"; "Conspicuous"; "Contract"; "Electronic"; "Term".
1. Scope of the Section. This section brings together various rules regarding the construction and application of provisions of this Act.
2. Purpose of the Act. Paragraph (1) states the basic principle that this Act must be construed in light of its purposes. The purposes of this Act, as stated in that paragraph, are not regulatory, but are oriented toward facilitating and supporting commercial practice in the information and toward supporting the evolution of commercial practice, through agreement and trade practices. To construe an act in light of its purposes does not mean, of course, that the general purposes supplant the specific provisions of this Act. However, in cases of uncertainty, the meaning of this Act should be construed in light of the stated purposes, not in light of abstract concepts of how law should interact with commercial in computer information.
3. Mandatory Language. The provisions of this Act ordinarily do not use the phrase "unless otherwise agreed" and frequently use mandatory language such as "shall" or "must." Neither drafting convention alters the basic principle that the agreement controls and supersedes any rule in this Act, except as indicated in Section 104. Paragraph (2) rejects decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995) (disallowing alteration by agreement of a particular section). The effect of all of this Act's provisions may be varied by agreement except as expressly prohibited.
4. Negative Inference. Paragraph (3) resolves questions about the existence of a negative pregnant. The statement of an affirmative result does not necessarily indicate that a different result occurs if the conditions in the statute are not met. Thus, if a provision states: "If the originator of a message requests acknowledgment, the following rules apply: -", this does not indicate what rule governs in the absence of a request. Similarly, a provision that states that particular language or procedure yields a specific result does not indicate what result occurs with different language or procedure. It merely states the affirmative proposition. If a different interpretation is intended, it is made express in the statute.
SECTION 107. LEGAL RECOGNITION OF ELECTRONIC RECORD AND AUTHENTICATION; USE OF ELECTRONIC AGENTS.
(a) A record or authentication may not be denied legal effect or enforceability solely because it is in electronic form.
(b) This [Act] does not require that a record or an authentication be generated, stored, sent, received, or otherwise processed by electronic means or in electronic form.
(c) In any transaction, a person may establish requirements regarding the type of authentication or record acceptable to it.
(d) A person that uses its own electronic agent for 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 References: Section 102: "Authentication"; "Electronic"; "Record."
1. General Concept. This section states a fundamental principle of electronic commerce. The fact that a message, record or authentication is electronic does not alter its legal impact. Of course, this rule applies only within the scope of this Act. It does not apply to payment orders or documents of title.
2. Relation to Evidence Issues. This section merely states the affirmative legal principle that the electronic nature of a record does not allow denial of its legal validity because of it electronic nature. This does not address the questions of proof or questions about attribution of the record or authentication.
3. Establishing requirements. Subsection (c) makes clear that parties can set their own requirements regarding records that are acceptable to them. They are not required to deal electronically or to accept an electronic record or authentication. This principle, of course, does not authorize a party unilaterally to change requirements of an agreement. Ordinary standards concerning waiver, modification and similar concepts govern in that context.
4. Electronic Agents. Subsection (d) states the general principle that operations of an electronic agent bind the party that used the agent for that purpose. See also Section 215 in reference to attribution rules. Electronic agents are automated systems that respond to or originate messages or performances. They enable important savings in transactional costs and this Act provides legal support sustaining their use. The concept embodies principles like those under ordinary agency law that the electronic agent function within the scope of its intended purpose. In reference to human agents, this concept is often cast in terms of whether the human agent acted within the scope of its actual or apparent authority. Here, since the concept deals with automation without human involvement, the focus is more accurately placed on whether the agent was used for the relevant purpose. Cases of fraud, manipulation and the like are discussed in Section 206.
SECTION 108. PROOF AND EFFECT OF AUTHENTICATION.
(a) Authentication may be proven in any manner, including showing that a party made use of information or access that could only have been available if it engaged in conduct or operations that authenticated the record or term.
(b) Subject to Section 215, compliance with a commercially reasonable attribution procedure for authenticating a record authenticates the record as a matter of law.
(c) Unless the circumstances indicate otherwise, authentication is considered to have been done with the intent to:
(1) establish a person's identity; and
(2) establish that person's adoption or acceptance of the authenticated record, term, or contract.
Definitional References: Section 102: "Attribution procedure"; "Authenticate"; "Contract"; "Electronic agent"; "Information"; "Informational Rights"; "Record".
1. Proof of Authentication. In dealing with an authentication, two separable issues are (1) whether the symbol or process was intended as an authentication, and (2) to whom the authentication is attributed. Under subsection (b), compliance with a commercially reasonable procedure for authentication removes questions about whether an authentication was intended or occurred. It does not resolve attribution issues under Section 215. Subsection (b) deals with whether there was an authentication, while Section 215 identifies who is responsible. Ordinarily, the two issues are resolved in a single step. On whether an attribution procedure is commercially reasonable, see Section 214.
Proof of authentication can occur in any manner. One of the most important involves showing that a process existed that required an authentication in order to proceed in an automated system. To satisfy the concept of authentication, however, it is not sufficient merely to show that some act was required to proceed. The act must constitute an authentication (e.g., execution of a relevant symbol).
2. Effect of Authentication. As with common law signatures, an authentication can be used with several different intended effects. Section 102. Unless the circumstances indicate otherwise, the presumed intent encompasses both effects listed in subsection (c). Contrary indications would be present if the attribution procedure was used solely for a single effect. Intention under this section must, as in other contexts, be gauged by objective criteria. Circumstances may indicate that an authentication was done to accomplish results other than or in addition to those listed here. This section does not preclude that from occurring.
SECTION 109. CHOICE OF LAW.
(a) 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) In the absence of an enforceable choice-of-law term, the following rules apply:
(1) An access contract or a contract providing for electronic delivery of a copy is governed by the law of the jurisdiction in which the licensor is located when the agreement is made.
(2) A consumer contract that requires delivery of a copy on a physical medium is governed by the law of the jurisdiction in which the copy is or should have been delivered to the consumer.
(3) In all other cases, the contract is governed by the law of the jurisdiction having the most significant relationship to the transaction.
(c) In cases governed by subsection (b), if the jurisdiction whose law governs under that subsection is outside the United States, the law of that jurisdiction governs only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. Otherwise, the law of the jurisdiction in the United States which has the most significant relationship to the transaction governs.
(d) For purposes of this section, a party is located at its place of business if it has one place of business, at its chief executive office if it has more than one place of business, or at its place of incorporation or primary registration if it does not have a physical place of business. Otherwise, a party is located at its primary residence.
Uniform Law Source: Restatement (Second) of Conflicts 188. Revised.
Definitional References: Section 102: "Access contract"; "Agreement"; "Consumer"; "Consumer contract"; "Contract"; "Copy"; "Delivery"; "Electronic"; "Licensor"; "Party".
1. Scope of the Section. This section deals with two issues. The first concerns the enforceability of contract terms that select the applicable law. Subsection (a) adopts a freedom of contract position, limited by a consumer protection rule. The second issue concerns choice of law in the absence of a contract term. Subsections (b) and (c) provide needed certainty in electronic commerce and enact a uniform general rule to eliminate current uncertainty.
2. Purpose of Rules. Contract terms that select the law applicable to the contract are routine in commercial contracts. The information economy accentuates their importance because communications capabilities allow remote parties easily to enter into and perform contracts through systems spanning multiple jurisdictions and in circumstances that do not depend on the physical location of either party or of the information. Many computer information transactions occur in cyberspace, rather than in definable, fixed locations. This enables many small businesses to engage in multistate or multi-national business, but if an agreement cannot designate applicable law, even the smallest business could be subject to the law of all fifty States and all countries in the world. That result would have adverse effects on electronic commerce, imposing substantial costs and uncertainty on providing products over the Internet. This section is one of the most important electronic commerce rules in this Act.
3. Contractual Choice of Law. This Act provides for enforcement of choice of law agreements in commercial contracts. This rule follows the rule adopted in a majority of decisions dealing with the issue in information-related contracts. See Medtronic Inc. v. Janss, 729 F.2d 1395 (11th Cir. 1984); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st Cir. 1993); Universal Gym Equipment, Inc. v. Atlantic Health & Fitness Products, 229 U.S.P.Q. 335 (D. Md. 1985). The Restatement (Second) of Conflict of Laws § 188 has a similar rule validating such contract terms for all issues that can be resolved by agreement and many agreements even as to otherwise non-waivable terms. Subsection (a) does not require that the contract choice select the law of a jurisdiction with a "reasonable relationship" to the transaction. In a global information economy, limitations of that type are inappropriate and arbitrary. See, e.g., White House Report, A Framework for Global Electronic Commerce, July 1, 1997, ("The U.S. should work closely with other nations to clarify applicable jurisdictional rules and to generally favor and enforce contact provisions that allow parties to select substantive rules governing liability."). Of course, however, a term that unreasonably selects a wildly inappropriate law may be unconscionable in a contract of adhesion.
As this indicates, agreed terms on applicable law may in some circumstances be restricted by a court. For example, a contract choice inconsistent with over-riding fundamental public policy of the forum State may be unenforceable. Section 105(b). See Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th 881, 72 Cal. Rptr.2d 73 (Cal. App. 1998). Compare Lowry Computer Products, Inc. v. Head, 984 F. Supp. 1111 (E.D. Mich. 1997). Also, under subsection (a), the agreement cannot override an otherwise applicable law in a consumer contract which cannot be altered by agreement. While this rule imposes significant costs on Internet commerce, this section adopts the view that the fundamental policy of freedom of contract should be varied to preserve consumer rules when an individual State, having addressed the cost and benefits, determines that the rule is mandatory and non-waivable. The referenced law includes the mandatory provisions of this Act and consumer laws referenced in Section 105 if those laws would apply in the absence of the agreed choice under the general principles on choice of law stated in this section.
4. Choice of Law: no contract term. Subsection (b) states what choice of law rules apply in the absence of an agreed term on the issue. Contracts in information are not like sales of goods contracts in that they can be created and performed remotely, a factor encouraging the need for tailoring of rules. Stating uniform default law rules here enhances certainty in transactions. Without guidance, electronic commerce would be immersed in choice of law doctrine whose current condition is captured in the following comment: "[C]hoice-of-law theory today is in considerable disarray - and has been for some time. [It] is marked by eclecticism and even eccentricity. No consensus exists among scholars . . . The disarray in the courts may be worse." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). That condition does not facilitate global commerce in information.
This section adopts a rule similar to Restatement (Second) of Conflicts of Law, but enacts two superseding concepts. The most important is in subsection (b)(1), which deals with electronic transactions, a situation in which attempting to apply conflicting traditional choice of law concepts is especially problematic. For such transactions, subsection (b)(1) selects as the applicable law the law of the jurisdiction in which the licensor is located. This enhances certainty in a context where, by virtue of the nature of the distribution systems, an on-line vendor, large or small, makes direct access available to the entire world via the Internet. Any other rule might require that the information provider comply with the law of all States and all countries since under the technology it will not necessarily be clear or even knowable where the information is being sent. The licensor's location is defined in subsection (d); it does not depend on the location of the computer that contains the information.
Subsection (b)(2) is a consumer rule applicable to transactions involving physical delivery of tangible copies. The rule selects the law of the place where the copy was to be delivered. Thus, if a consumer was to receive delivery of software in Chicago, the transaction is subject to the law of Illinois unless the agreement indicates otherwise. This rule is consistent with current U.S. law. It is followed in many European consumer laws relating to goods. Because the transaction involves delivery of a copy on a physical medium, the licensor knows where delivery will occur.
Subsection (b), of course, only deals with contract law. It does not affect tax, copyright, or similar issues. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (tax nexus); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381 (9th Cir. 1995) (copyright).
5. Most Significant Relationship. In the absence of an agreement and except for the rules in subsections (b)(1) and (b)(2), subsection (b) adopts a "most significant relationship" test. The Restatement (Second) of Conflicts of Law uses a similar test and cases interpreting that rule are applicable here. The "most significant relationship" standard requires consideration of various factors including: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, (e) the domicile, residence, nationality, place of incorporation and place of business of the parties, (f) the needs of the interstate and international systems, (g) the relevant policies of the forum, (h) the relevant policies of other interested States and the relative interests of those States in the determination of the particular issue, (i) the protection of justified expectations, (j) the basic policies underlying the particular field of law, and (k) certainty, predictability and uniformity of result.
6. Foreign Countries. Subsection (c) provides a rule in cases where the default rules select the law of a foreign country and the effect of applying that rule is a choice that is substantively inappropriate. This is especially important in Internet commerce. The rule allows a court to revert to a different choice of law principle if the choice would otherwise fail to give a party substantially similar protections to those available under this Act. In applying subsection (c), courts should reverse the basic choice of law rule only in extreme cases. It is not sufficient merely that the foreign law is different. The differences must be substantial and adverse. The subsection does not address which party has the burden to establish the foregoing. Subsection (c) does not apply if the agreement chooses applicable law.
SECTION 110. CONTRACTUAL CHOICE OF FORUM.
(a) The parties in their agreement may choose an exclusive judicial forum unless the choice is unreasonable and unjust.
(b) A choice-of-forum term is not exclusive unless the agreement expressly so provides.
Definitional References: Section 102: "Agreement"; "Party"; "Term".
1. Scope of the Section. This section deals with contractual choice of an exclusive judicial forum. It does not deal with agreements that permit (consent to), but do not require, litigation in a designated jurisdiction. Permissive choice of forum clauses are governed by general contract law. The section deals only with choice of a judicial forum. Arbitration or other non-judicial forum choices are governed by other law.
2. General Rule. Choice of forum agreements are generally enforceable under current law. In this respect, this section adopts the approach of modern cases, as initially stated in Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972), which treat choice of forum clauses as presumptively valid. A choice of forum clause is valid unless it is made invalid under general principles of this Act such as unconscionability or is invalidated by the limiting principle stated in this section. The general rule of validity governs whether the term is in a custom agreement or in a standard form. The Restatement (Second) of Conflicts of Law proposes a rule similar to that adopted here.
3. Fairness Limitation. A choice of forum term is enforced unless it is "unreasonable and unjust." This rule follows Bremen. The term is unenforceable if it has no valid commercial purpose and has severe and unfair affects on the other party. This precludes enforcement of clauses that choose a forum solely to prevent the other party from contesting disputes. Such terms may be unreasonable in that they have no commercial purpose or justification and their impact may be unjust in that the term unfairly harms the other party. On the other hand, a contractual choice of forum that responds to a valid commercial purpose is not invalid simply because it has an adverse effect on a party, even if bargaining power is unequal. The burden of establishing that the clause fails lies with the party asserting its invalidity. Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972); Pelleport Investors, Inc. v. Budco Quality Theaters, Inc., 741 F.2d 273 (9th Cir. 1984); Restatement (Second) of Conflicts of Law § 80, comment c (1989 rev.)
The agreed choice may be limited in additional ways. In some cases, a contract choice may be inconsistent with over-riding fundamental public policy of the forum State or an express statute that, if applicable to a transaction precludes the choice of forum. Section 105(b). Also, agreements obtained through fraud or duress may be invalidated under general provisions of law that supplement this Act. Section 104.
4. Electronic Commerce. Choice of forum terms are especially important in electronic commerce. By 1999, over one hundred reported decisions had dealt with the issue of personal jurisdiction in the Internet, reflecting the extent to which this medium makes the issue extremely difficult in the absence of contractual guidance. The decisions reveal an uncertainty about when doing business on the Internet exposes a party to jurisdiction in all States and all countries. The uncertainty affects both large and small enterprises, but has greater impact on small enterprises which are and will continue to be the lifeblood of electronic commerce. Choice of forum terms allow parties to control this issue and the risk or costs it creates. This section allows the agreement to govern, but adds restrictions based on fundamental public policy considerations. See White House Report, A Framework for Global Electronic Commerce, July 1, 1997.
Courts have recognized the importance of the issue. See, e.g., Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2nd Cir. 1998). In Internet transactions, a reasonable choice of forum will seldom be invalid. The Court's discussion in Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991) is relevant to determining reasonableness in Internet contracting:
[It would] be entirely unreasonable to assume that a cruise passenger would or could negotiate the terms of a forum clause in a routine commercial cruise ticket form. Nevertheless, including a reasonable forum clause in such a form well may be permissible for several reasons. Because it is not unlikely that a mishap in a cruise could subject a cruise line to litigation in several different fora, the line has a special interest in limiting such fora. Moreover, a clause establishing [the forum] has the salutary effect of dispelling confusion as to where suits may be brought . . . Furthermore, it is likely that passengers purchasing tickets containing a forum clause . . . benefit in the form of reduced fares reflecting the savings that the cruise line enjoys . . .
In an Internet transaction, choice of forum will often be justified on the basis of the international risk that would otherwise exist. Choice of a forum at a party's location is reasonable.
SECTION 111. UNCONSCIONABLE CONTRACT OR TERM.
(a) If a court as a matter of law finds the contract or any term thereof to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid any unconscionable result.
(b) If it is claimed or appears to the court that a contract or any 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: Section 2-302.
Definitional References: Section 102: "Contract"; "Term".
1. Scope of the Section. This section adopts the doctrine innovated in original Article 2 of the Uniform Commercial Code that allows courts to invalidate unconscionable contracts or terms.
2. Basic Policy and Effect. This section allows courts to rule directly on the unconscionability of the contract or a particular term and to make a conclusion of law as to its unconscionability. The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the terms involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making the contract. Subsection (b) makes it clear that it is proper for the court to hear evidence on these questions. The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.
3. Electronic commerce. While this Act confirms the enforceability of automated contracting practices involving "electronic agents," in some cases automation may produce unexpected results because of errors in programs, problems in communication, or other unforeseen circumstances. When this occurs, common law concepts of mistake may apply, as may the provisions of Section 217 and Section 206. In addition, unconscionability doctrine may invalidate a term caused by breakdowns in the automated contracting processes.
4. Remedy. The court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single term or group of terms which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.
5. Decision of the court. Unconscionability is a decision to be made by the court. The commercial evidence allowed under subsection (b) is for the court's consideration, not for the jury. Only the terms of the agreement which result from the court's action on these matters are to be submitted to the general triers of fact for resolution of a matter in dispute.
SECTION 112. MANIFESTING ASSENT; OPPORTUNITY TO REVIEW.
(a) 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 to adopt or accept it;
(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) An electronic agent manifests assent to a record or term if, after having an opportunity to review, the electronic agent:
(1) authenticates the record; or
(2) engages in operations that the circumstances clearly indicate constitute acceptance.
(c) If this [Act] or other law requires assent to a specific term, a manifestation of assent must relate specifically to the term.
(d) Conduct or operations manifesting assent may be proved in any manner, including a showing that a procedure existed by which a person or an electronic agent must have engaged in the conduct or operations in order to obtain, or to proceed with use of the information or informational rights. Proof of assent depends on the circumstances. Proof of compliance with subsection (a)(2) is sufficient if there is conduct that assents and subsequent conduct that electronically reaffirms assent.
(e) With respect to an opportunity to review, the following rules apply:
(1) A person has an opportunity to review a record or term only if the record or term is made available in a manner so that a reasonable person ought to have had it called to the person's attention and permit review.
(2) An electronic agent has an opportunity to review a record or term only if the record or term is made available in manner that would enable a reasonably configured electronic agent to react to the record or term.
(3) 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:
(A) it had a right to a return if it rejected the record;
(B) the record proposed a modification of contract;
(C) the record provided particulars of performance under Section 305; or
(D) in a case not involving a mass-market license, the parties at the time of contracting had reason to know that a record or terms would not be presented at or before the initial use or access to the information or informational rights.
(4) The right to a return under paragraph (3) may arise by law or by agreement.
(f) The provisions of this section may be modified by an agreement setting out standards applicable to future transactions between the parties.
Uniform Law Source: Restatement (Second) of Contracts § 19.
Definitional References: Section 102: "Authenticate"; "Electronic agent"; "Information"; "Informational Rights"; "Knowledge"; "Person"; "Reason to know"; "Record"; "Term".
1. Scope and Purpose. This is an important electronic commerce section. This section provides standards for "manifestation of assent" and "opportunity to review". "Manifesting assent" has several roles in contract law. Two treat manifestation of assent as (1) a way by which a party indicates agreement to a contract, and (2) a way by which a party may adopts a record as stating the terms of the contract. Most often, the same conduct does both. In addition, in some cases, assent to a particular term may be required to make the term enforceable.
2. Source and General Theme. The term, "manifesting assent," comes from Restatement (Second) of Contracts § 19. This section corresponds to the Restatement. While the concepts in the Restatement here are commonly accepted, this section more fully explicates the concept than case law; also, codification creates uniformity in terminology and application making an important contribution to commercial certainty.
Manifesting assent is fulfilled by a signature or specific language of assent, but does not require a signature, specific language, or any specific conduct. In electronic commerce, it is especially important to clarify the conditions under which conduct may establish contractual relationships and expressly to recognize the diverse alternatives that exist.
3. Three analyses. Determining whether a person manifested assent to a record or term entails analysis of three issues:
• First, the person must have had knowledge of the record or term or an opportunity to review it before assenting. This is implicit, but not stated in the Restatement. Opportunity to review requires that the record be available in a manner that ought to call it to the attention of a reasonable person.
• Second, given an opportunity to review, the person must do something that assents to the terms. The person may authenticate the record or term, express assent, or engage in conduct with reason to know that in the circumstances the conduct indicates assent. Restatement (Second) of Contracts § 19. Conduct manifests assent if the party intentionally acted with knowledge or reason to know that the other party would infer assent from its actions or words.
• Third, the conduct or authentication must be attributable to the person. General agency law and Section 215 provide standards for attribution.
4. Assent by Authentication. Under prior law, a person assents to a record or term by signing it. In this Act, "authentication" replaces "signature", but the concept remains the same. See notes to Section 102 (definition of authentication).
5. Assent by Conduct. Assent occurs if a party acts (or fails to act), or makes a statement, having reason to know these will be inferred as assent by the other party. Determining when this occurs requires attention to the circumstances. As in general common law, assent does not require proof of subjective intent, knowledge, or purpose, but focuses on objective characteristics, including whether there was an act or a failure to act voluntarily engaged in with reason to know the inference of assent that would be drawn. Assent does not require that a party be able to negotiate or alter terms. However, the assenting conduct or failure to act must be voluntary. This is satisfied if the alternative of refusing exists even if refusal would leave no alternative source for the refused deal.
Actual knowledge that conduct constitutes assent suffices. More generally, factors indicating that a person may have "reason to know" that its acts indicate assent include: the context, including any language on a package, a container or in a record, indicates what indicates assent; the fact that the actor can decline to engage in conduct and return the information, but decides not to do so; the information communicated to the actor before the conduct occurred; whether the conduct gave the actor access to and use of information that was offered subject to a contract; and the ordinary expectations of other persons in similar contexts, including standards and practices of the business, trade or industry; or other relevant factors. As in the Restatement, failure to act constitutes assent if the party that fails to act has reason to know this will create an inference of assent.
This section recognizes the wide range of behavior and interactions that in modern commerce establish a contract and its terms. To encourage the use of duplicative consent procedures when appropriate, subsection (c) makes clear that if the assenting party has an opportunity to confirm or deny assent before proceeding to obtain or use the information, the confirmation establishes the existence of assent. This sets out one method of meeting the criteria of subsection (a)(2). In many cases, of course, a single indication of assent by an electronic or other act, such as by opening a container or commencing to use information, suffices if it occurs under circumstances giving the actor reason to know that this signifies assent. On the other hand, an act that does not bear a relationship to a contract or a record would fail under the general standard. Similarly, acts that occur in context of a mutual express reservation of the right to defer agreement do not assent to a contract that neither party intended.
Illustration 1: The registration screen for NY Online prominently states: "Please read the license. It contains important terms about your use and our obligations with respect to the information. Click here to review the License. If you agree to the license, indicate this by clicking the "I agree" button. If you do not agree, click "I decline". The on-screen buttons are clearly identified. The underlined text is a hypertext link which, if selected, promptly displays the license. A party that indicates "I agree" manifests assent to the license and adopts its terms.
Illustration 2: The first computer screen of an on-line stock-quote service requires that the potential licensee enter a name, address and credit card number. After entering the information and striking the "enter" key, the licensee has access to the data and receives a monthly bill. In the center of the screen amid other language in small print, is the statement: "Terms and conditions of service; disclaimers" indicating a hyperlink to the terms. The customer's attention is not called to this sentence nor is the customer asked to react to it. Even though entering name and identification, coupled with using the service, assents to a contract, there is no assent to the "terms of service" and disclaimer since there is no act indicating assent to the record containing the terms. A court would determine the contract terms on other grounds, including the default rules of this Act and usage of trade.
6. Objective standard. Manifesting assent requires that, from all the facts known to it, a reasonable person has reason to know that particular conduct will indicate that the actor assents to a record or term. Actions objectively indicating assent are effective even though the actor may subjectively intend otherwise. This follows traditional contract law doctrine of "objective" assent. This is especially important in electronic commerce where many transactions do not involve contact between individuals. Information providers and licensees must rely on objective actions indicating acceptance of contracts. Doctrines of mistake, supplemented by Section 217, as well as doctrines invalidating the effects of fraud and duress apply in appropriate cases.
7. Electronic Agents. Assent may occur by automated systems. Electronic commerce entails rapidly increasing use of computer programs programmed to search for (on behalf of a potential purchaser) or make available (on behalf of a potential licensor) particular information under contractual terms or alternatives. Either or both parties (including consumers) may use electronic agents. The reduced transaction costs that come from a technology that enables broad comparative and electronic shopping are immense for consumers and for providers of information. However, as reflected in this section, when using an electronic agent, assent cannot be based on knowledge (programs are not human). The issue is whether the circumstances clearly indicate that the operations of the system indicate assent. Safeguards exist under unconscionability doctrine and Section 206.
8. Third Party Service Providers. Assent requires an act by the party to be bound or its agents. In many Internet situations, a party is able to reach a particular system because of services provided by a third party communications or other service provider. In such cases, the services provider typically does not intend to engage in a contractual relationship with the provider of the information. While the "customer" activity may constitute assent to terms, it does not bind the service provider since the service provider's actions are in the nature of transmissions and making information access available, not assent to a contractual relationship.
This Act is clear that service providers - providers of online services, network access, or the operation of facilities thereof - do not manifest assent to a contractual relationship simply from their provision of such services, including but not limited to transmission, routing, providing connections, linking or storage of material at the request or initiation of a person other than the service provider. If, for example, a telecommunications company provided the routing for a user to reach a particular online location, the 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 of 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.
9. Other Means of Assent. Manifestation of assent to a record is not the only way in which parties establish their bargain. This Act does not alter recognition of other methods of agreement. For example, a product description can become part of an agreement without manifestation of assent to a record repeating the description; the product description can define the bargain itself. Thus, a party that markets a database of names of consumer attorneys can rely on the fact that the product need only contain consumer attorneys because this is the basic bargain it is proposing; the provider is not required to seek manifest assent to a record stating that element of the deal. Similarly, the licensee may rely on the fact that the database must pertain to consumer lawyers, not other lawyers. The nature of the product defines the bargain if the party makes the purchase on that basis. If a product is clearly identified on the package or in representations to the licensee as being for consumer use only, the terms are effective without requiring language in a record restating the description or conduct assenting to that record. Of course, if the nature of the product is not obvious and there is no assent to a record defining that nature or other agreement to it, such conditions might not become part of the agreement.
In many cases, copyright or other intellectual property notices restrict use of a product, regardless of assent to contract terms. For example, common practice in video rentals places a notice on screen of limits on the customer's use under applicable copyright and criminal law, such as by precluding commercial public performances. The enforceability of such notices does not depend on compliance with this section.
10. Authority to Act. The person manifesting assent must be one that can bind the party seeking the benefits or being charged with the obligations or restrictions of the agreement. If a party proposing a record desires to bind the other party, it must establish that it dealt with a person that had actual or apparent authority to do so or, at least, establish that the entity allegedly represented by that person accepted the benefits of the contract or otherwise ratified the individual's actions. If the person who assented did not have authority and the conduct was not ratified or otherwise adopted, there may be no contract. If this occurs, both parties may be exposed: the licensor risks loss of its contract terms, while the licensee risk is that use of the information may infringe a copyright or patent.
There must be a connection between the individual who had the opportunity to review and the one whose acts constitute assent. Of course, a party with authority can delegate that authority to another. Thus, a CEO may implicitly authorize her secretary to agree to a license when the CEO instructs the secretary to sign up for legal materials online or to install a newly acquired program that is subject to a screen license.
Questions of this sort arise under agency law as augmented in this Act. In appropriate cases, rules in this Act regarding attribution play a role in resolving whether the ultimate party is bound to the contract terms. Section 215 deals with when, in an electronic environment, a party is bound to records purporting to have come from that party. Other law governs questions of agency.
11. Assent to particular terms. The section distinguishes assent to a record and, if required by other provisions of this Act or other law, assent to a particular term. Assent to a record relates to the record as a whole, while assent to a particular term, if required, encompasses acts that relate to that particular term. One act, however, may assent to both the record and the term if the circumstances, including the language of the record, clearly indicate to the party that doing the act is also assent to the particular term.
12. Proof of Terms. A party that relies on the terms of linked text or other electronic records must establish the content of the text at the time of the licensee's assent. One way of doing so is to retain records of content at all periods of time or maintain a record of changes and their timing. Issues of proof are matters of evidence law.
13. Opportunity to Review. Assent, under this Act, cannot occur unless preceded by an opportunity to review the terms to which one assents. Common law and reported cases are not clear on this requirement. Under subsection (e), 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. This is met if the person actually knows or has reason to know that the record or term exists and the circumstances permit review of the record or term or a copy thereof. For an electronic agent, an opportunity to review exists only if the record is one to which a reasonably configured electronic agent could respond.
a. Declining to Use the Opportunity to Review. An opportunity to review exists even if a person foregoes the opportunity. Contract terms presented in an over the counter transaction or made available in a binder as required for some transactions under federal law create an opportunity to review even if the party does not use that opportunity. This is not changed because the party desires to complete the transaction rapidly, is under external pressure to do so, or because the party has other demands on its attention, unless one party intentionally manipulates the circumstances to induce the other party not to review the record.
b. Permits Review. How a record is made available for review differs for electronic and paper records. In both settings, however, a record is not available for review if access to it is so time-consuming or cumbersome as to effectively preclude review. It must be presented in such a way as to reasonably permit review. In an electronic system, a record that is promptly accessible through an electronic link ordinarily qualifies. Actions that comply with federal or other applicable consumer laws that require making contract terms or disclosure available or that provide standards for doing so, satisfy this section.
14. Return. In modern commerce, there are circumstances in which the terms of a record are not available until after there is a commitment to the transaction. This is often true in mail order transactions, software contracts, insurance contracts, airline ticket purchases, and other common transactions. If the record is available only after that commitment, there is no opportunity to review unless the party can return the product (or in the case of a vendor that refuses the other party's terms, recover the product) and receive reimbursement of any payments if it rejects the record. This return right, which does not exist in current law absent agreement, creates important protection for the party asked to assent.
This right is also intended to provide a strong incentive for a provider of information to make the terms of the license available up-front if commercially practicable. Doing so avoids the obligations regarding return stated in this Act, both in this section and in Sections 211 and 613. In addition to that incentive, a decision to defer presentation of a license, without a commercial reason to do so, may have implications on application of other doctrines, such as the general concept of unconscionability where the terms are oppressive.
The return right exists only for the first user.
Failure to provide an opportunity to review or a right to a return in cases of records presented after the initial commitment to the transaction, does not invalidate the agreement, but means that the terms of the record have not been assented to by the party to which it was presented. The terms of the agreement must then be discerned by consideration of all the circumstances, including the general expectations of the parties, applicable usage of trade and course of dealing, and the informational property rights, if any, involved in the transaction. See Section 212. In such cases, courts should be careful to avoid unwarranted forfeiture or unjust enrichment regarding the conditions or terms of the agreement. An agreement whose payment and other agreed terms reflect a right to use solely for consumer purposes can not be transformed into an unlimited right of commercial use by a failure of assent to the terms of a record.
15. Modifications and Layered Contracting. The return provisions do not apply to or alter law on modification of an agreement or the law regarding the agreed right of a party to specify particulars of performance. The provisions also do not apply in the commercial context of Section 112(e) where parties begin performance in the expectation that a record containing the contract terms will be presented and adopted later.
16. Modification of Effect. In general, when applicable, the provisions of this section cannot be altered by agreement because they are the means by which aspects of the agreement are established. Subsection (f), however, allows parties by a prior agreement, to restructure what does and does not constitute assent with respect to future conduct. In most cases, of course, such a prior agreement will in context satisfy the requirements of this section in full even as to the subsequent transactions.
SECTION 201. FORMAL REQUIREMENTS.
(a) Except as otherwise provided in this section, a contract requiring payment of $5,000 or more is not enforceable by way of action or defense unless:
(1) the party against which enforcement is sought authenticated a record sufficient to indicate that a contract has been formed and which reasonably identifies the copy or subject matter to which the contract refers; or
(2) the contract is a license for an agreed duration of one year or less or which can be terminated at will by the party against which the contract is asserted.
(b) A record is sufficient under subsection (a) even if it omits or incorrectly states a term, but the contract is not enforceable beyond the number of copies or subject matter shown in the record.
(c) A contract that does not satisfy the requirements of subsection (a) but which is valid and enforceable in all other respects, is enforceable if:
(1) a performance was tendered or the information was made available by one party and the tender was accepted or accessed by the other; or
(2) the party against which enforcement is sought admits in court, by pleading, testimony, or otherwise 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) 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 10 days after the confirming record is received.
(e) An agreement that the requirements of this section need not be satisfied as to future transactions is effective if evidenced in a record authenticated by the person against which enforcement is sought.
(f) Except as otherwise provided in Section 105 and this section, no statute of frauds imposed by any law of this State applies to a transaction within the scope of this [Act].
Uniform Law Source: Uniform Commercial Code: Section 2A-201. Revised.
Definitional References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Copy"; "Information"; "License"; "Merchant"; "Notice"; "Party"; "Reason to know"; "Receive"; "Record"; "Term".
1. General Policy. This section provides important protections in commerce because of the character of computer information as contractual subject matter, the threat of infringement, and the split of interests involved in a license with ownership of intellectual property rights in one party and rights or privileges to use or to possess a copy in the other. The section blends traditional U.C.C. concepts which focus on value issues with common law approaches that focus on duration of the contract in determining when a record is required.
The effect of this section must be construed in relationship to federal intellectual property statutes that may establish an independent, preemptive statute of frauds. The Copyright Act, for example, requires a signed writing for an effective "transfer" of a copyright. This includes a requirement of a signed writing in the case of an exclusive license of a copyright and applies or not depending on the interpretation of that term under copyright law. Obviously, Section 201 merely states a rule applicable under state law and, as to federal law, the copyright provision controls when applicable. The federal rule does not apply to non-exclusive licenses of copyright.
2. Basic Rule. Subject to the stated exceptions, a contract is not enforceable by way of action or defense unless there is a record indicating that a contract was formed, if the contract calls for payments in excess of $5,000 and is a license for an agreed duration of one year or more. This dual standard reflects two traditional statute of frauds rules. The intent is to focus the formalities required by statute on transactions of significance, without requiring unnecessary formalities in the numerous small transactions that occur in ordinary commerce.
The $5,000 must be payments required under the contract. A royalty term that may ultimately yield millions of dollars would not come within this requirement unless there was a minimum payment that exceeds $5,000. Similarly, the existence of an option that might trigger an additional payment is not relevant unless the "option" payment is mandatory.
For licenses, a record is required if the dollar amount is met and the license is for an agreed term of more than one year. A license for a perpetual duration, whether that exists because of an express term or through application of default rules, exceeds one year as would any license that states a term longer than a year even if the license may be terminated by a party before that time. On the other hand, a license for an indefinite term that is subject to termination at will does not exceed a one year term. The existence of an option to extend the duration of the license does not bring the contract within the statute unless the option is mandatory.
3. Record Required. The record, when required, must be sufficient to indicate that a contract was formed and must reasonably identify the copy or subject matter involved. No particular formalities are required. Only three invariable requirements are made by subsection (a). First, the record must evidence a contract within the scope of this Act. Second, it must be authenticated. Third, it must specify the copy or subject matter involved.
The required record need not contain all material terms of the contract or even be designated by the parties as the contract. The record must, however, give a reasonable basis for believing that a contracts exists. Extrinsic evidence, including course of dealing and course of performance, along with the supplemental rules of this Act may provide the remaining terms. Of course, the mere fact that a record exists which satisfies this section does not indicate that a contract was in fact formed. For example, while the record need not describe all elements of scope of a license, disputes about scope may indicate that no contract exists. See Section 202.
There is no requirement that the record be retained. Obviously, retaining the record is good practice and may affect questions of proof, but this section follows existing law and merely requires that the record exist at a point in time. In electronic systems, a "record" requires that information be in a form from which it can be perceived. This section does not take a position on how long the information must be in that form, but a record is not a mere ephemeral manifestation of information.
a. Authenticated.
The record must be authenticated by the party to be bound. A party can prove prior existence of an authenticated record by showing that a procedure existed by which an authenticated record must necessarily have been made in order for the party to have proceeded in use of the information or another activity.
In this Act, "authentication" replaces the term "signature", but the concept is the same. In most cases, as under prior law on signatures, no real question will exist about the intended meaning of an authentication (or signature) or it can be presumed that the authentication is intended to express agreement to a record and identify the party. In the few cases in which doubt exists, since the concept of the rules in this section is that there must be some indication of the existence of a contract, the authentication must be made with intent to adopt or agree to the record or to identify the person as associated with the record which indicates the existence of the contract. Section 108 states a presumption generally assumed to be true under prior law on signatures: unless the circumstances indicate to the contrary, an authentication encompasses an intent to identify the party and to accept or adopt the record and its terms. The intent referred to pertains to the person making the authentication, not to the person receiving the authenticated record. See notes to Section 102(4).
b. Subject Matter.
The record must describe the copy or subject matter covered by contract. "Subject matter" refers to defining to which information the contract refers. The section does not require description of the scope of the license. A reference to a film clip from the motion picture "Wise Choices" satisfies this section even though the record does not describe what rights were granted. Filling out the details of scope and actual terms is a matter of parol evidence. A record is adequate for purposes of this section if it refers to one copy of the word processing software "Word Perfection." There is no requirement that the record describe the quantity or contract fee.
4. Exception: Partial Performance. Circumstances may render subsection (a) moot. One involves tender of performance by one party and acceptance by the other. These acts adequately document that a contract exists and the record required under subsection (a) is unnecessary. This section rejects the Article 2 rule that allows partial performance to validate the existence of a contract only to the extent of the performance itself. That rule is not consistent with the limited nature of the required record and splits transactions in an unacceptable manner. Parol evidence rules and ordinary contract interpretation principles protect against unfounded claims of extensive contract obligations. The exception requires tender and acceptance of performance. A party relying on the exception must show that the copy was tendered to it by the other party. Mere possession of a copy does not meet this exception, which depends on proving an authorized source for the copy. Similarly, the performance tendered and accepted must be sufficient to show a contract exists and cannot consist of minor acts of ambiguous nature.
Partial performance under this section only allows the party to prove the existence of the contract. It does not, of course, prove the contract terms, which terms must be established under other provisions of this Act. It merely avoids the defense stated in subsection (a). For example, in an alleged contract to develop and deliver three modules of a new program, tender and acceptance of one module satisfies this section, but whether there is a contract covering three modules must be proven by the party claiming that to be the case.
5. Exception: Judicial Admissions. A record is not needed if the party charged with the contract obligations admits in judicial proceedings that a contract exists. The admission confirms the existence of the contract to the extent of the subject matter admitted.
6. Exception: Confirming Memoranda. Subsection (d) follows original Article 2. Between merchants, failure to answer a record that contains a confirmation of a contract within ten days of receipt is tantamount to an authenticated record under this section and satisfies this section with respect to both parties. This validates practice in many industries where the volume or nature of the transactions make it impossible to prepare and receive assent to records as part of making the initial agreement. The confirming memorandum places the other party on notice that a contract has apparently been formed. Accordingly, it must object to the existence of a contract if one, in fact, does not exist.
The memorandum removes the statutory bar to enforcement. The only effect, however, is to take away from the party who fails to answer, the defense of this section. The burden of persuading the trier of fact that a contract was actually made prior to the confirmation is unaffected by this rule. Cf. Section 203 (effect on contract terms). The confirming memorandum does not of itself establish the terms of the contract, which terms must be established under other provisions of this Act such as general rules on manifesting assent to a record or agreeing to a modification.
7. Other Agreements. Subsection (e) confirms the enforceability of trading partner or similar agreements that alter the formal requirements of this section with respect to covered transactions. The parties can agree in an authenticated record to conduct business without additional authenticated writings. That agreement satisfies the statute and the policies of requiring minimal indication that a contract was formed.
8. Other Laws. Subsection (f) clarifies that the formalities required by this section supplant formalities required under most other laws relating to transactions within this Act. Exception is made for laws referenced in Section 105. This rule is applicable only with respect to state law. In many licenses, federal law requires 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.
9. Estoppel. This section does not address the relevance of equity theories such as estoppel in cases where the required record is not present. The law on the applicability of estoppel remains as it existed before the adoption of this Act.
SECTION 202. FORMATION IN GENERAL.
(a) 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) 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) Even if one or more terms are left open or to be agreed upon, a contract does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
(d) In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including scope.
(e) If a term is to be fixed by later agreement and the parties intend not to be bound unless the term is so fixed, a contract is not formed if the parties 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 and other materials already received and refund any contract fee paid for which performance has not been received. The parties remain bound by any contractual use restriction with respect to information or copies received or made and not delivered or deliverable to the other party.
Uniform Law Source: Uniform Commercial Code: Sections 2-204; 2-305(4); 2A-204.
Definitional References: Section 102: "Agreement"; "Contract"; "Contract fee"; "Contractual use restriction"; "Electronic agent"; "Information"; "Licensee"; "Licensor"; "Party"; "Receive"; "Scope"; "Term".
1. Scope of the Section. This section describes basic contract formation rules. The section is subject to the specific rules on offer and acceptance in Sections 203, 204, 205, and 206. This Act separates two issues. One concerns whether a contract was formed. The second concerns what are the terms of that contract, an issue dealt with in general rules of interpretation, the parol evidence rule, and Sections 210, 211, and 212. Often, of course, the same events create a contract and define its terms.
2. Manner of Formation. Subsection (a) states a basic policy recognizing the effect of any manner of expressing agreement, oral, written or otherwise, including by conduct or inaction. This follows original Article 2 of the U.C.C. Of course, no contract is formed without an intent to contract. This section does not impose a contractual relationship where none was intended by the parties. In determining whether conduct or words establish a contract, courts should look to the entire circumstances, including usage of trade and course of dealing.
Subsection (a) also expressly recognizes that an agreement can be formed by operations of electronic agents. This gives force to a choice made by the party to use an electronic agent. The agent's operations bind the user. In this Act, the operations of electronic agents are treated as having specified effects in law attributable to a party. Section 215.
3. Time of Formation. Subsection (b) confirms that a contract can be formed even though the exact time of its formation is not known, if the actions or records of the parties or the operations of their electronic agents confirm the existence of a contract.
4. Open Terms and Layered or Rolling Transactions. As in common law, subsection (c) recognizes that if the parties intend to enter a binding agreement, that agreement is valid despite missing or otherwise open terms so long as there is any reasonably certain basis for granting a remedy. This rule does not apply if the parties do not intend to be bound unless or until the remaining terms are agreed by the parties. This distinction, based on the intent of the parties states a basic principle applicable under both original Article 2 of the U.C.C. and common law. See Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2nd Cir. 1998) ("Under New York contract law, parties may enter into a contract orally even though they contemplate later memorializing their agreement in writing. If, however, the parties do not intend to be bound absent a writing, they will not be bound until a written agreement is executed."); Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d Cir.1986).
If there is an intent to be bound, the test for enforceability is not certainty as to all terms about what the parties were to do, what obligations they assumed, or what damages are due on breach. Rather, commercial standards are to be applied to answer these questions in light of the recognition that in many commercial arrangements, terms are defined over time, rather than at one specific time. The more terms the parties leave open, however, the less likely it is that they have intended to conclude a binding agreement, but their actions are frequently conclusive on the formation issue despite the omissions.
Subsection (c) distinguishes between preliminary negotiations or incomplete efforts to make a deal, and actions or statements with an intent to be bound even though terms are left open. Making the distinction requires consideration of all of the circumstances. If the parties intend a contract, it can be formed despite the existence of terms remaining to be agreed and terms left open. On the other hand, if there is no intent to contract, no contract exists and the default rules of this Act do not create one.
This section provides a foundation for the layered contracting that typifies many areas of commerce and is recognized in original Article 2 of the U.C.C. for transactions in goods. The foundation begun here is further developed in Sections 210, 211, and 305. The concept that all contracts arise at one single point in time and that this single event defines all terms of agreement is not consistent with modern commercial practice. Contracts are often formed over a period of time, and contract terms are often developed during performance, rather than before performance occurs. In some cases, later adopted terms might be viewed as a modification of the agreement, but often the parties expect to adopt records later and that expectation itself is the agreement. Rather than a modification of an existing agreement, these terms fulfill prior expectations or normal practice. They are part of the agreement itself, rather than proposed changes. Treating later proposed terms as a proposed modification is appropriate only if the deal has in commercial understanding of both parties has been closed and recognized as a contract with no reason to expect new terms to be provided. If the parties do not intend to be bound unless later terms are agreed to, subsection (e) gives guidance for unwinding the relationship.
During the period of time in which the terms in layered contract are being developed or to be proposed, it is not appropriate to apply default rules of this Act. The default rules are applicable only if the "agreement" of the parties does not deal with the subject matter of the default rule. Agreement may be found in express terms, or through application of usage of trade or course of dealing, or inferred from other conduct of the parties. In layered contracting, the agreement is that there are no terms on the undecided issues until the terms are made express by the parties. Applying a default rule there might in fact be a case of applying the rule despite contrary agreement. Of course, distinguishing such cases from cases in which the default rule should apply in the interim requires consideration of the circumstances of the transaction and, especially, usage of trade, course of dealing, and other indicia of the expectations of the parties.
5. Disagreement on Material Terms and Scope. A significant disagreement about an important (material) term indicates that no intent to enter a contract exists. The "scope" of the license goes to the fundamentals of the transaction and what the licensor intends to transfer and what the licensee expects to receive. Indeed, in many respects, the contract scope provisions are the basic product description. Disagreements about this fundamental issue indicate fundamental disagreement about the contractual subject matter.
6. Failure to Agree. Subsection (e) derives from original Section 2-305(4) of the U.C.C. and indicates procedures that apply where the parties conditioned agreement on subsequent specification of terms, but that later determination did not occur. The basic principle is that the parties are to return to the status that would have prevailed in the absence of any initial agreement.
SECTION 203. OFFER AND ACCEPTANCE IN GENERAL. Unless otherwise unambiguously indicated by the language or the circumstances:
(1) An offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances.
(2) An order or other offer 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 nonconforming copies is not an acceptance if the licensor seasonably notifies the licensee that the shipment is offered only as an accommodation to the licensee.
(3) If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.
(4) If an offer in an electronic message evokes an electronic message in response, 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: Sections 2A-206; 2-206. Revised.
Definitional References: Section 102: "Access Materials"; "Copy"; "Contract"; "Delivery"; "Electronic"; "Electronic message"; "Licensee"/ "Licensor"; "Information"; "Notifies"; "Party"; "Receive"; "Term".
1. Scope. Sections 203 through 205 deal with offer and acceptance. This section states general rules, while the next two sections deal with (1) acceptances that vary the offer and (2) conditional offers or acceptances.
2. Methods of Acceptance. A party has a right to control the terms of acceptance of its offer if it does so expressly, but in the absence of that, any reasonable manner of acceptance suffices. As under the Restatement (Second) of Contracts § 19 and original Article 2 of the U.C.C., acceptance may be in any form.
a. Any Reasonable Manner. Any reasonable manner of acceptance is available unless the offeror made clear that a method is not acceptable or that acceptance requires a particular method. This follows original Article 2. This standard accommodates new methods of communication as they develop.
b. Shipment or Promise to Ship. Either a shipment or a prompt promise to ship or transmit is a proper means of acceptance unless the offer otherwise provides. This follows original Section 2-206(1)(b) of the U.C.C.
c. Beginning of Performance. The beginning of performance by an offeree can be effective as an acceptance to bind the offeror only if followed within a reasonable time by notice to the offeror. To be effective, the beginning of performance must unambiguously express the intent to be bound.
d. Electronic Responses. In the case of electronic messages and performances, this section adopts a time of receipt concept for both the effectiveness of an electronic acceptance and the effectiveness of a electronic performance which serves, for purposes of acceptance, as the beginning of performance or full performance. In electronic commerce, the relevant performance may often entail making access available to the other party. In this case, acceptance by performance occurs when the access is enabled or the access materials are received by the offeror.
SECTION 204. ACCEPTANCE WITH VARYING TERMS.
(a) In this section, an acceptance materially alters an offer if it contains terms that materially conflict with or vary the terms of the offer or that add material terms not contained in the offer.
(b) 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) If an acceptance materially alters the offer, a contract is not formed unless all other circumstances, including the conduct of the parties, establish a contract. If a contract is formed, the terms of the contract are determined:
(1) under Section 210 or 211, if one party agreed, by manifesting assent or otherwise, to the other party's terms other than by the acceptance that contained the varying terms; or
(2) under Section 212, if paragraph (1) does not apply and the contract is formed by conduct.
(d) If the acceptance contains varying terms but does not materially alter the offer, a contract is formed on the terms of the offer. Terms in the acceptance that conflict with terms in the offer are not part of the contract. In addition, the following rules apply:
(1) Additional terms contained in the acceptance are treated as proposals for additional terms.
(2) Between merchants, the proposed additional terms become part of the contract unless the offeror gives notice of objection before or within a reasonable time after it receives the proposed terms.
Uniform Law Source: Uniform Commercial Code: Section 2-207.
Definitional References: Section 102: "Contract"; "Delivery"; "Merchant"; "Give notice"; "Party"; "Receive"; "Seasonable"; "Term". Section 112: "Manifest assent".
1. Scope of the Section. This section deals with offer and acceptance where the alleged acceptance contains terms that vary the offer, but neither the offer nor the acceptance is made expressly conditional on acceptance of all its own terms. Conditional offers and acceptances are dealt with in Section 205.
2. Acceptance Varying the Offer. This section recognizes that a contract may be formed even though the offer and acceptance contain varying terms that do not fully match. For this to occur, however, the record containing the acceptance with the varying terms must be a definite expression of acceptance. When the record contains terms that differ from the offer, these conditions are seldom met except in cases involving routine use of standard form purchase orders or invoices. In most other cases, an expression containing varying terms constitutes a counter-offer, rather than an acceptance.
A term is a varying term if it conflicts with a term of the offer in whole or in part, or if it covers an additional subject not dealt with in the offer. This section follows the principle originally stated in Article 2 of the U.C.C. which altered the common law "mirror image" rule that all terms must perfectly match for there to be an effective acceptance. Common law in most States no longer consistently follows the mirror image rule.
When neither the offer nor the acceptance are expressly conditioned on acceptance of their own terms, there are two different cases. In one, the offer and acceptance materially conflict. In the other, the differences are not material. Acceptances with varying terms do not form a contract if the variance is material.
3. Varying Terms: Material Variance. Subject to the rules dealing with conditional offers or acceptances, subsection (c) provides that a material variance in a purported acceptance precludes contract formation based on the purported acceptance. What constitutes a material variation depends on the context, including what degree of acceptable variation the parties might reasonably expect in light of applicable trade use and course of dealing. However, an "acceptance" that purports to alter basic elements of the proposed bargain is not an acceptance and, in the absence of conduct creating a contract, no contract is formed by that "acceptance" unless the new terms are accepted by the other party. Standards of materiality in this context include whether the additional terms involve unreasonable surprise when measured against the commercial context, including usage of trade and course of dealing, or whether they so change the effect of the other terms of the offer and acceptance such as to significantly alter the bargain reached.
An acceptance that materially varies the offer does not create a contract. However, this rule does not preclude formation of a contract by conduct. If a contract is formed by the circumstances, including conduct of the parties, the important issues center on what terms are applicable. Subsection (c) contemplates two approaches to determining the terms of the contract. The first arises if one party agreed to the terms of the other. In that case, the terms of the accepted record control subject to the limitations in Sections 210 and 211. Agreement can be expressed in any manner except that it cannot be found solely in the "acceptance" that contains a materially varying term. The second is where the exchanged offer and acceptance materially conflict, but a contract is formed solely by conduct. This places the relationship under Section 212 which instructs a court to consider the entire context in determining the terms of the contract.
4. Varying Terms: Non-Material Variance. If an acceptance does not materially vary the offer, it forms a contract. The terms of the contract are those of the offer. Section 212 does not apply because the contract is formed by offer and acceptance, not by conduct. Subsection (d) allows for inclusion of non-material additional terms contained in the acceptance in a transaction between merchants unless the offeror timely objects to those terms. An offeror controls its offer. That principle is contained in Section 2-207 of the U.C.C. If the acceptance differs from the offer and the difference is not material, the offer controls. If the differences are material, no contract was formed.
SECTION 205. CONDITIONAL OFFER OR ACCEPTANCE.
(a) Except as otherwise provided in subsection (b), an offer or acceptance that, because of the circumstances or the language, is conditioned on agreement by the other party to the terms of the offer or acceptance, precludes formation of a contract unless the other party agrees to its terms, by manifesting assent or otherwise.
(b) If an offer and acceptance are in standard forms and one or both are conditioned on acceptance of their terms, the following rules apply:
(1) Conditional language in a standard term precludes the formation of a contract only if the party proposing the form acts in a manner consistent with the language, as by refusing to perform, refusing to permit performance, or refusing to accept the benefits of the contract, until the proposed terms are accepted.
(2) A party that agrees, by manifesting assent or otherwise, to a conditional offer that is effective under paragraph (1) adopts the terms of the offer under Section 210 or 211, except terms of the conditional offer which conflict with any expressly agreed terms on price and quantity.
Uniform Law Source: Uniform Commercial Code: Sections 2-206; 2-207.
Definitional References: Section 102: "Agreement"; "Contract"; "Party"; "Standard form"; "Term". Section 112: "Manifest assent".
1. Conditional Offers and Acceptances. A person has a right to state and insist on preconditions for acceptance of its offer without being forced into a different contractual relationship. That principle is basic to general contract law and is stated expressly in subsection (a). In commercial practice, the most common type of conditional offer or acceptance limits the other party to acceptance of all of its terms or rejection of the offer. No principle in contract law precludes a party from insisting on such conditions.
The conditioning language need not be in a record or stated in any specific form of language. Oral conditions are as effective as are conditions contained in a record. Conditions implicit in the circumstances are as effective as conditions in a personal letter.
2. Conditional Standard Forms. Conditional language in standard terms of a standard form creates special problems in "battle of forms" transactions where either or both parties make an acceptance or offer expressly conditional on its specific terms, but perform irrespective of acceptance of the condition. Subsection (b) treats this as a question involving the effectiveness of the conditional language. In a standard form, the party desiring enforcement of its conditional language is entitled to that result only if its conduct corresponds to the condition, such as by precluding further performance unless the other party assents to its terms.
Illustration 1: Licensee sends a standard order form indicating that its order is conditional on the Licensor's assent to the terms on the Licensee's form. Licensor ships with an invoice conditioning the contract on assent to its terms. Purchaser accepts shipment. Here, neither party acted consistent with the language of condition. A contract exists based on conduct. The terms are governed by Section 212.
Illustration 2: In Illustration 1, assume that Licensor refuses to ship, but informs Purchaser that agreement to the Licensor's terms is a condition of shipment. It does not ship until Purchaser agrees to terms. Until that occurs, there is no contract. If it occurs, the contract exists based on the form agreed to.
Illustration 3. In Illustration 1, assume Licensor ships pursuant to a "conditional" form, but when the shipment arrives, Purchaser refuses it. In a telephone conversation, Licensor agrees to Purchaser's terms. Until that agreement, there is no contract; Purchaser acted in a manner consistent with its conditional language. When agreement occurred, that agreement sets out terms of the contract.
SECTION 206. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS.
(a) A contract may be formed by the interaction of electronic agents. If the interaction results in the electronic agents engaging in operations that confirm or indicate the existence of a contract by commencing performance, a contract is formed unless the operations resulted from fraud, electronic mistake, or the like.
(b) 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 actions that the individual is free to refuse to take or makes a statement that the individual has reason to know will:
(1) cause performance, provision of benefits, or allowance of the use or access that is the subject of the contract, or result in instructions to a person or an electronic agent to do so; or
(2) indicate acceptance or an offer, regardless of other expressions or actions by the individual to which the individual has reason to know the electronic agent cannot react.
(c) The terms of a contract formed under subsection (b) are determined under Section 210 or 211, but do not include terms provided by the individual if the individual had reason to know that the electronic agent could not react to the terms as provided.
Definitional References: Section 102: "Agreement"; "Contract"; "Electronic agent"; "Information"; "Party"; "Person"; "Reason to know"; "Term".
1. Scope of the Section. This section deals with: (1) an interaction between two electronic agents and (2) an interaction between a human (acting on the human's own behalf or for another person such as a company) and an electronic agent. Both interactions can create a contract. In each case, however, contract formation rules take into account the fact that an electronic agent cannot react to terms outside the scope of its programming and, at least in most cases, that the party using the agent does not, by virtue of that use, accept the possibility of agreeing to other terms. This section does not address the liability of a supplier of an electronic agent whose programming or lack of security causes loss. If such supply contract is within this Act, allocation of liability is handled as in any other contractual relationship. Liability under other law is not dealt with in this Act.
Modern systems enable the use of electronic contracting agents by consumers and other licensees as well as by licensors. Intelligent agents that search for information or other products within predefined purchase terms creates a significant new form of comparison shopping that is supported by the rules here.
2. Interaction of Electronic Agents. An interaction of two electronic agents can create a contract that bind the parties that used the agents to achieve that result if the operations of the electronic devices indicate that a contract exists. This rule follows the basic principle that conduct can create a contract. That would occur, for example, if the interaction results in information being sent by one agent and accepted in the system of the other. It might also occur if the agents' operations result in recording within their respective systems that a contract has been created. The terms of the contract that result from this interaction are determined under Section 210 or 211 as applicable.
3. Electronic Mistake and Fraud. Subsection (1) makes clear that restrictions analogous to common law concepts of fraud and mistake are appropriate to prevent abuse or clearly unexpected results. Courts applying these concepts may refer to cases involving mistake or fraud doctrine even though, in the case of electronic agents, the electronic agent cannot actually be said to have been misled or mistaken. Of course, parties may agree to reallocate the risk of mistake or fraud in a separately formed agreement, such as an EDI agreement setting out a procedure for subsequent electronic ordering. In cases involving a consumer, Section 217 provides a special application of mistake theory in electronic contexts. In cases where that special protection does not apply, general principles of law, such as concepts of mistake and law relating to fraud under common law and under this section apply. The section does not alter the general principle in Section 1-103 about the laws that generally supplement this Act.
Assent from the operations of the two electronic agents does not arise if the operations are induced by mistake, fraud or the like. Formation of a contract does not occur if a party or its electronic agent manipulates the programming or response of the other electronic agent in a manner akin to fraud. Such acts, in essence, vitiate the inference of assent which would occur through the normal operations of the agent. Similarly, the inference is vitiated if because of aberrant programming or through an unexpected interaction of the two agents, operations indicating the existence of a contract occur in circumstances that are not within the reasonable contemplation of the person using either electronic agent. In such cases, the circumstances are analogous to mutual mistake. In some cases, especially if the electronic agent is supplied by one party to the purported agreement, it would be appropriate for a court to avoid results that are clearly outside the reasonable expectations of the other party. The concept here is more akin to the law of unilateral mistakes except that it places the risk on the party that supplied the agent for and required its use in a particular transaction.
4. Interaction of Human and Electronic Agent. Contracts may be formed by an interaction of a human and an electronic agent. The electronic agent's ability to bind the party using it derives from the choice of that party to so use an automated system. A contract is formed if the human makes statements or engages in conduct that indicate assent. Consistent with the concept of manifesting assent, assent may be indicated by taking actions with reason to know that they indicate agreement. Here, that occurs if the acts or statements will cause the electronic agent to deliver benefits or permit the access that is the subject matter of the contract. Statements by the human purporting to alter or vitiate agreement to which the electronic agent cannot react are ineffective.
Illustration 1: Tootie is an electronic system for placing orders with Home Shop. If a customer dials the number, a voice instructs the customer to indicate a credit card number, the item number, the quantity, the customer's location, and other data. Customer, after entering the data, verbally states that he will only accept the information if there is a 120 day "no questions" return right. Otherwise: "I don't want the damn things." Customer has reason to know that the electronic system cannot react to the verbal condition. Tootie automatically orders shipment.
There is a contract. The verbal condition is ineffective. Stating conditions beyond the capability of the agent to react does not vitiate agreement when there is reason to know that they cannot be dealt with by the electronic system. Agreement is indicated by the steps that initiate shipment.
Illustration 2: Officer dials the ATT information system using his 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 ATT computer dials the number, having located it in the database.
User's "counter offer" is ineffective. The charge to the company includes the additional $1.00.
SECTION 207. FIRM OFFERS. An offer by a merchant made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the stated time or, if a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days. A term of assurance in a standard form supplied by the offeree to the offeror is ineffective unless the offeror authenticates the term.
Uniform Law Source: Uniform Commercial Code: Sections 2A-205; 2-205.
Definitional References: Section 102: "Authenticate"; "Contract"; "Merchant"; "Party"; "Record"; "Standard form"; "Term".
This section follows original Article 2 of the U.C.C.
SECTION 208. FORMATION: RELEASES OF INFORMATIONAL RIGHTS.
(a) A release is effective without consideration if it is:
(1) in a record to which the releasing party agrees, by manifesting assent or otherwise, and which identifies the informational rights released; or
(2) enforceable under estoppel, implied license, or other rules of law.
(b) A release continues for the duration of the informational rights released if the agreement does not specify its duration and does not require affirmative performance after the grant of the release by:
(1) the party granting the release; or
(2) the party receiving the release, except for relatively insignificant acts.
(c) In cases not governed by subsection (b), the duration of a release is governed by Section 308.
Definitional References: Section 102: "Agreement"; "Informational rights"; "License"; "Party"; "Record"; "Release".
1. Releases: General Rationale. A release is an agreement that the releasing party will not to object to, or exercise any remedies to limit, the use of information or informational rights. It is a license, but does not contain an obligation by the releasing party to enable or support the other party's use of the information.
2. Releases: Enforceability. A release is enforceable without consideration if the release is by a record to which the releasing party agrees, by manifesting assent or otherwise. This clarifies the enforceability of releases in a record, but does not alter other law making releases enforceable, including law enforcing releases given without consideration. For this result, subsection (1) requires agreement to a record. This includes all modern means of recording assent and all forms of records, such as by filmed assent.
Releases are common in Internet "chat room" and "list service" systems. Participation often requires permission to use comments or materials submitted. If the relationship is a contract supported by consideration (e.g., the operator grants the right to use the service in return for the release), the release is enforceable based not on the consideration but on assent, such as by assenting in a sign-on screen. The same is true when there is no consideration. If the service is a public service, e.g., dealing with information that persons view as confidential (e.g., a service dealing with the treatment of AIDS), a condition of participation that precludes use of the information associated with the names of the participants is enforceable even though there may be no consideration.
Illustration: X operates an on-line chat room and a monthly newsletter of selected comments. When an individual enters the chat room, the sign-on screen states: "By participating you grant X the right to use your comments in any medium." By joining, the participant releases its copyright in its comments. The on-screen condition is a record to which the participant's acts assent.
3. Releases: Duration. Absent contrary agreement, a release is for the duration of the released rights. Of course, the release is effective only with respect to its own terms. A release that allows use of a person's image in an Internet site does not release rights to other uses of that image.
SECTION 209. FORMATION: SUBMISSION OF INFORMATION.
(a) The following rules apply to a submission of information for the creation, development, or enhancement of computer information which is not made pursuant to an existing agreement requiring the submission:
(1) A contract is not formed and is not implied from the mere receipt of an unsolicited submission.
(2) 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) 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 accepted pursuant to that procedure; or
(B) the recipient expressly agrees to terms concerning the submission.
(b) An agreement to disclose an idea creates a contract enforceable against the receiving party only if the idea as disclosed is confidential, concrete, and novel to the business, trade, or industry or the party receiving the disclosure otherwise expressly agreed.
Definitional References: Section 102: "Agreement"; "Information"; "Informational rights"; "License"; "Party"; "Record"; "Release".
1. Idea Submissions: General Premise. Section 209 deals in a limited way with an important issue in information industries: submissions of ideas for the creation, development or enhancement of computer information. The subsections do not deal with (1) submissions of ideas for improving business operations or (2) with equity theories of liability. This leaves undisturbed the array of doctrines dealing with equitable remedies, but clarifies the effect of a submission in contract law. A distinction is stated between submissions pursuant to an agreement and unsolicited submissions.
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 that gives some courts difficulty. If the submission was not solicited, mere receipt of the submission does not create a contractual relationship. The receiving party may have an obligation to return copies in some cases, but the unilateral action of the other party cannot create obligations in contract on the recipient. This is true, as indicated in subsection (a)(2), even if the industry itself ordinarily relies on ideas. Contracts only arise in the event of agreement by the parties.
Subsection (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. 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, a party agrees for a fee to submit an idea for enhancing the success of audiovisual works, the contract is not satisfied if the idea is "draw more attractive images." This adopts New York law and cases such as Oasis Music Inc. v. 100 USA, Inc., 614 N.Y.S.2d 878 (N.Y. 1994). A submission that does not meet this standard does not breach the contract, unless the agreement gave express assurances that the submission would be novel. The licensee cannot recover payments it already made. Rather, the default rule is that the provider of the non-novel submission cannot enforce any future obligations as to the submitted idea. The basic principle is that a non-novel idea is not adequate consideration for a contract and that a proponent of an idea implicitly represents that the idea has value. This is not met in a case of a non-novel idea.
This principle does not require that the idea rise to the level of novelty as that term is used in patent law. But the information must not be something that is generally and widely known. Cases on combination secrets and other situations in trade secret law where information has sufficient uniqueness or secrecy to qualify as a trade secret should inform decisions under this standard.
Nothing in this section precludes an agreement that does not hinge on the uniqueness of the proposed submission. Whether such agreement exists must be judged based on the fundamental notion that a party does not implicitly contract away its rights, without a fee, to use publicly known information merely because it contracted for "disclosure" of such material.
SECTION 210. ADOPTING TERMS OF RECORDS.
(a) Except as otherwise provided in Section 211, a party adopts the terms of a record, including a standard form, if the party agrees to the record, by manifesting assent or otherwise.
(b) The terms of a record may be adopted as the terms of the contract after beginning performance or use under the agreement, if the parties had reason to know that their agreement would be represented in whole or in part by a later record to be agreed on and there would be no opportunity to review the record or a copy of it before performance or use began. If the parties fail to agree to terms and did not intend to form a contract unless they agreed, Section 202(e) applies.
(c) 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 References: Section 102: "Agreement"; "Contract"; "Copy"; "Party"; "Reason to know"; "Record"; "Standard form"; "Term". Section 112: "Manifest assent"; "Opportunity to review."
1. Scope of the Section. This Act deals separately with forming a contract and with the terms of that contract. This section is the primary section on adoption of terms of a record as terms of a contract. Section 211 limits the creation of terms in mass-market licenses and the time over which they can be presented. Section 212 deals with cases when records do not create contract terms, but a contract exists because of conduct.
This section states basic principles about when and how terms of a record are adopted and also expressly recognizes that commercial deals often involve layered contracting, providing a standard for determining when this type of term creation exists. Subsection (a) rejects the idea that a contract and all terms must be formed at a single point in time. It permits the layered contracting in cases where the parties have reason to believe that terms will be proposed at some later time. The effect of a failure to agree to the later terms depends on whether the agreement on terms was a condition to the existence of a contract.
2. Adopting Terms. If a party agrees to a record, it adopts the terms of the record whether or not the record is a standard form. Standard forms are common in commercial practice because they provide efficiencies for both parties. Treating them in law as less than any other record of a contract would put commercial law in conflict with commercial practice and reduce the efficiencies such records provide. Because of the broad opportunities allowed in the Internet, standard forms will increasingly not be the province of only one party to the deal. This section rejects decisions which hold that a term that is not unconscionable or induced by fraud may still be invalidated because a court holds, after-the-fact, that a party could not have expected it to be in the contract. Absent unconscionability, fraud or similar conduct, commercial parties are bound by the records to which they assent.
a. Knowledge of Terms. It is not necessary that the adopting party actually read, understand, or negotiate the terms of a record. This rule follows virtually universal law in the United States. Assent to the record encompasses assent to its terms. Unconscionable terms are unenforceable despite assent.
b. Modes of Assent. A party is bound by the terms of a record only if it agrees to the record, by manifesting assent or otherwise. The party may authenticate (sign) the record. The party's conduct may indicate assent to a record or a contract. Section 112. The latter focuses on objective manifestations of assent. A party cannot manifest assent to a form or other record unless it has had an opportunity to review that form before reacting. Finally, there are residual modes of assent that satisfy the idea that assent must be objectively expressed, even though they do not fit the precise standards of authentication or manifesting asset.
3. Later Terms: Layered Contracting. In ordinary commercial practice, while some contracts are formed and their terms fully defined at a single point in time, many commercial transactions involve a rolling or layering process. An agreement exists, but terms are clarified or created over time. That principle is acknowledged in various portions of original Article 2 of the U.C.C. For example, Comments to original Section 2-207 of the U.C.C. note that later records presented to the other party are treated as proposed modifications or confirming memorandum only in cases of "a proposed deal which in commercial understanding has in fact been closed." Section 2-207, Comment 2. Where that is not true, the later terms are part of the primary contracting process. Similarly, original Section 2-311 allows enforcement of agreements that permit one party to later specify the particulars of performance (e.g., terms of the contract) after the initial agreement is reached. See also original Section 2-305.
Often, the commercial expectation is that terms will follow or be developed after performance begins. While some courts seem to hold that an initial agreement per se concludes the contracting as a single event notwithstanding ordinary practice and expectations that terms will follow, other courts recognize layered contract formation and term definition, correctly viewing contracting as a process, rather than a single event. ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). Often, performance commences with each party understanding that terms will be provided for later agreement, or otherwise used to define the contract. See Brower v. Gateway 2000, Inc., ___ N.Y.S.2d ___ (N.Y.A.D. 1998). This section, along with the contract formation principles, explicitly accepts the layering principle and provides a standard for distinguishing when the intent or expectations is to conclude the contract at the initial point as contrasted to an expectation that terms will be provided for later agreement. In information commerce, the circumstances often indicate that initial general assent assumes that terms will be developed or presented later to fill out the details of the transaction. Such circumstances include customary practices in software licensing, but also will include use of electronic agents by licensees. For example, a business or a consumer may instruct its electronic agent to search the Internet for car dealers willing to meet pre-set terms and offer prices within a pre-set range. While the business or consumer will expect to stand on the terms accepted by the dealer, both it and the dealer expect more details to be added to the contract, such as warranty, maintenance, and other standard provisions, without having to consider all such terms in the first interaction of the automated contracting system.
Subsection (a) clarifies that contract terms can be proposed and agreed to as part of completing the initial contract even though proposed after the beginning of performance by one or both parties. Such terms are treated as part of the initial contracting process if at the time of initial agreement, the parties had reason to know and, thus, expected that this would occur and that terms of a record to be agreed would provide elaboration of their contract. If, instead, the parties considered their deal to be closed at the outset, then subsequently proposed terms from either party are treated as a proposed modification of the agreement, effective only under concepts applicable to such modifications. The third alternative, of course, is that the initial agreement leaves terms open and allows one party to specify what those terms are at some later date. The act of specifying the terms is, in effect, merely a performance of the contract.
In layered contracting terms are created over time. Thus, for example, where the parties reach an initial agreement about a multiple delivery contract and begin shipments before reducing that agreement to more elaborate written terms, the record when agreed to does not modify the original agreement, but reflects an expansion and elaboration as part of that contract. Similarly, the parties might begin performance on a software development agreement while terms are being developed. When a final, fully elaborated record is completed and agreed to, it does not amend the contract, but simply becomes part of the now finalized contractual arrangement. If there is no assent to the record, whether the parties have a contract hinges on whether they regarded assent to the record once developed as a condition to a contractual relationship. If so, and if there is no agreement, there is no contract; equitable principles apply to avoid unjust enrichment and other effects of the beginning of performance.
The concept in subsection (a) differs from Section 305 which refers to agreements that give one party or its designate a contractual right to specify or particularize terms of performance. In cases governed by those sections, the party receiving the later terms is not presented with a right to agree to or reject the terms; the terms are in effect part of the original agreement. Where no further assent is required under the agreement, Section 305 indicates that the terms must be proposed in good faith and in accordance with reasonable commercial standards.
Subsection (a) indicates that a layered contracting exists if the parties at the time of the initial agreement had reason to know that this would occur. The "reason to know" standard parallels the standard for determining when acts constitute assent to a contract. Reason to know does not require specific notice or specific language in an original agreement, although such factors may play a role in determining reason to know. It can also be inferred from the entire circumstances, including routine or ordinary practices of which a party is or should be aware. In some areas of commerce, such as many aspects of software contracting and many forms of mail order contracting, the circumstances of the agreement in ordinary commerce give reason to know that terms may be subsequently proposed. In Section 210, the time over which the record can be proposed is referenced to the expectations of the parties under the reason to know standard. At some point, the deal has been closed, but specifying when this occurs in terms of a fixed time standard is impossible in general commerce. It requires an analysis focused on the context and circumstances.
The standard set out in subsection (a) is also reflected in similar transactions in the mass market under Section 211. Section 211, however, places a time limit on when proposal of the terms must occur and precludes the terms from altering terms that are expressly agreed by the parties. In addition, Section 211 creates a uniform right to a cost free refund if the proposed terms are unacceptable to the receiving party. See also Section 613.
4. Right to a Return. In many cases governed by subsection (a) and in mass-market licenses, if assent is sought after the person paid or delivered or became obligated to pay or deliver, the manifestation of assent is not effective unless the person had a right to a return if it chooses to refuse the license. Section 112(e). This return obligation applies in mass market contracts and in other contracts if the expectation is that the terms will be provided at or before the first use of the information, a typical format in certain types of software contracting. It does not apply in the more open-ended commercial arrangements where there is merely an expectation that terms will be agreed to (or rejected) at some point during performance, such as in the software development agreement mentioned in Note 3. In these contexts, general principles of equity apply to deal with the circumstances where there is ultimately a failure to agree.
5. Adoption of Terms. Subsection (b) states a principle found in the Restatement and in general common law. Assent to a record adopts all of the terms of the record and there is no requirement that the party read or separately assent to each term. This section rejects the rule in Restatement (Second) of Contracts § 211(3) regarding invalidation of some terms. The concerns about unfair surprise and the like dealt with there are addressed in this Act under the doctrine of unconscionability which is adopted from original Article 2 of the U.C.C.
SECTION 211. MASS-MARKET LICENSE.
(a) A party adopts the terms of a mass-market license for purposes of Section 210 only if the party agrees to the license, by manifesting assent or otherwise, before or during the party's initial performance or use of or access to the information. A term is not part of the license if:
(1) the term is unconscionable under Section 111 or is unenforceable under Section 105(a) or (b); or
(2) subject to Section 301, the term conflicts with terms to which the parties to the license expressly agreed.
(b) If a licensee does not have an opportunity to review a mass-market license or a copy of it before becoming obligated to pay and does not agree, by manifesting assent or otherwise, to the license after having that opportunity, the licensee is entitled to a return under Section 112 and, in addition, to:
(1) reimbursement of any reasonable expenses incurred in complying with the licensor's instructions for return or destruction of the computer information or, in the absence of instructions, incurred for return postage or similar reasonable expense in returning it; 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 upon removal of the installed information because of rejection of the license.
(c) In a mass-market transaction, if the licensor does not have an opportunity to review a record with proposed terms before the licensor delivers or becomes obligated to deliver the information, and if the licensor does not agree, by manifesting assent or otherwise, to those terms after having that opportunity, the licensor is entitled to a return.
Definitional References: Section 102: "Contract"; "Information"; "Information processing system"; "Informational Rights"; "License"; "Licensor"; "Mass-market license"; "Party" "Return"; "Term". Section 112: "Manifest assent".
1. Scope of the Section. This section deals with mass-market licenses, including consumer contracts. It defines the circumstances under which a party's assent to a mass-market license adopts the terms of that record and places limitations on the effectiveness of mass-market licenses. The section should be read in connection with Section 210 and Section 112. While most current mass-market licenses are presented by the licensor and accepted by the licensee, modern technology and contracting practices are not necessarily so limited and the section would also apply to a mass-market license presented by a licensee and accepted by a licensor in the mass market.
Many mass-market licenses are presented and agreed at the outset of a transaction; some are presented afterwards. This section deals with both. The costs of return provided for in subsection (b) provide strong incentives for terms of the license to be presented at the outset when practicable. Many mass-market transactions involve three parties and two contracts. The three-party arrangement is also addressed in Section 613.
2. General Mass-Market Rules.
There are a number of ways in which the terms of a mass market or other contract can be specified. This can and does often occur by a general agreement of the parties unrelated to any record containing specific terms. In other cases, as described in Section 305, the parties may agree that the terms or particulars of performance may be specified later by one party. See Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y.A.D. 1998). Under Section 305, the later supplied terms are enforceable without further agreement to them if the terms are proposed in good faith and within bounds of commercial reasonableness. This section deals with a third method of deriving the terms of a mass market agreement, obtaining assent to a record containing those terms - either at the outset of the transaction or shortly after it is initially formed.
Three limiting principles govern adoption of mass-market licenses regardless of when the license is presented and agreed to by the assenting party. In addition, as outlined in Section 105, fundamental public policy limit enforceability of mass-market terms in some cases. See notes to Section 105(b).
a. Assent and Agreement. A party adopts the terms of a record only if it agrees to the record by manifesting assent or otherwise. A party cannot manifest assent unless it had an opportunity to review the record before that assent occurs. This means that the record must be available for review and called to the person's attention in a manner such that a reasonable person ought to have noticed it. Section 112(e). A manifestation of assent requires conduct, including a failure to act, or statements, indicating assent and that the person has reason to know that, in the circumstances, this will be the case. Section 112 and related notes.
Adopting the terms of a record for purposes of this section occurs pursuant to Section 210. If the terms of the record are proposed for assent by a party only after it commences performance of the agreement, the terms become effective under these sections only if the party (e.g., the licensee) had reason to know that terms would be proposed after the initial agreement. Even if reason to know exists, this section requires that the terms be presented not later than the initial use of the information and that, if the mass-market license was not made available before the initial agreement, the person is given a right to a return should it refuse the license.
b. Unconscionability and Fundamental Public Policy. Even if a party adopts the terms of a record, a court may invalidate unconscionable terms pursuant to Section 111. Unconscionability doctrine invalidates terms that are bizarre and oppressive and hidden in boilerplate language. For example, a term in a mass-market license that default on the mass-market contract for $50 software cross defaults all commercial licenses between the parties may be unconscionable if there was no reason for the licensee to anticipate that breach of the small license would constitute breach of an unrelated larger license negotiated between the parties. Similarly, a clause in a mass-market license that grants a license back of trademarks or trade secrets of the licensee without any discussion of the issue between the parties would ordinarily be unconscionable. The principle is one of prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power. A court may also refuse to enforce a term of contract if it violates a fundamental public policy under Section 2B-105(b).
c. Conflict with Agreed Terms. In addition to unconscionability and Section 105(b), this section provides that standard terms in a mass-market form cannot alter the terms expressly agreed between the parties to the license. A term is expressly agreed if the parties discuss and come to agreement regarding the issue and the agreement becomes part of the bargain. For example, in a consumer contract where the consumer requests software compatible with a particular system and the vendor agrees to provide that compatibility, the standard terms cannot alter the agreement with the consumer to provide compatible software. As is true with express warranties, this is subject to traditional parol evidence concepts which bear on the provability of extrinsic evidence that varies the terms of the writing. Additionally, of course, under Section 613 the terms of any publisher's license cannot alter the agreement between the end user and the retailer unless expressly adopted by them as their own agreement.
Paragraph (a)(2) preserves the essential agreed bargain of the parties. For example, if a librarian acquires educational software for children from a publisher's retail outlet under an express agreement that the software may be used in its library network, a term in the publisher's license that limits use to a single user computer system conflicts with and is over-ridden by the agreement for a network license. This section rejects the test in Restatement (Second) of Contracts § 211(c), which has been adopted in only a small minority of States and poses significant uncertainty in ordinary contracting.
3. Terms Prior to Payment. If a mass-market license is presented before a price is paid, this Act follows general law that enforces a standard form contract if the party assents to it. See, e.g., Storm Impact, Inc. v. Software of the Month Club, 44 U.S.P.Q.2d 1441 (N.D. Ill. 1997) (on-screen license prevents waiver of copyright and precludes fair use claim).
The fact that license terms are non-negotiable or that the contract may constitute a "contract of adhesion" does not invalidate it under general contract law or this Act. A conclusion that a contract is a contract of adhesion may, however, require that courts take a closer look at contract terms to prevent unconscionability. See, e.g., Klos v. Polske Linie Lotnicze, 133 F.3d 164 (2d Cir. 1998); Fireman's Fund Insurance v. M.V. DSR Atlantic, 131 F.3d 1336 (9th Cir. 1998); Chan v. Adventurer Cruises, Inc., 123 F.3d 1287 (9th Cir. 1997). It should be recognized, however, that this Act's concepts of manifest assent and opportunity to review address concerns often relevant to such a review. Nevertheless, when applicable, the closer scrutiny followed in general contract law may be appropriate here.
The existence of a license is important to both the licensor and the licensee. In digital commerce, the license terms often define the product, for example, in distinguishing between single user and network use, consumer use and commercial use, and ordinary private use or rights to public display or performance. See ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). Market choices of this type provide an important commerce in this field. Often, the license and its enforcement benefit the licensee, giving it rights that would not be present in the absence of an enforceable license. See, e.g., Green Book International Corp. v. Inunity Corp., ___ F. Supp. ___ (D. Mass. 1998) (shrink wrap granted right to distribute an element of the software).
4. Terms after Initial Agreement. In the mass market, licenses are sometimes presented after initial general agreement between the ultimate licensee and either the retailer or the licensor-publisher. The contracting format allows contracts between end users and remote parties that control copyright or other interest in the information. Enforceability of the license is important to both parties. A sale of a copy of a copyrighted work does not give the copy owner a number of rights that it may desire. It does not convey a right to make multiple copies, to publicly display the work, to make derivative works from the copy, or, in the case of computer programs, to rent the copy to others. The enforceability of the license is also important for the rights owner because the terms of use and other conditions of the license help define the product it transfers. There are also general marketplace benefits in that the licensing framework allows price and market differentiation that allows product priced for and tailored to market demands of various forms, such as in distinguishing pricing of a consumer as compared to a commercial or educational license.
a. Timing of Assent. Agreement to the mass-market record can occur before, but must occur no later than during the initial use of the information. This places an outside limit on layered contracting in the mass market and acknowledges customary practices in the software and other industries applicable to that market. The time limitation enacts a potentially significant protection of the licensee's expectations in that market. Of course, this limitation does not prevent subsequent modification of the license at any other point in time or performance by a party that defines terms pursuant to agreement.
c. Cost Free Return Right. Subsection (b) involves assuring the licensee an opportunity to review and an effective choice to accept or reject a license presented after initial payment. It creates a return right that places the end user in a situation whereby it can exercise a meaningful choice regarding licenses presented after initial agreement. This Act refers to a return right, rather than a right to a refund, because it recognizes that in the mass market, under developing technologies, the concept of requiring this right may apply to either the licensee or the licensor, whichever is asked to assent to a record presented after the initial agreement.
In cases where the form is presented to the licensee after it becomes initially obligated to pay, it must be given a cost free right to say no. This does not mean that the end user can reject the license and use the information or that the user can return damaged or altered information or documentation. What is created is a right to return to a situation generally equivalent to that which would have existed if the end user had reviewed and rejected the license at the time of the initial agreement. The return right does not apply if the licensee agrees to the license. It is not a means by which a party may rescind an agreement to which it has assented, but rather a method of ensuring that assent in this setting is real. Thus, if after having an opportunity to review the license, the licensee manifests assent to it such as opening the packet holding software with reason to know that such will constitute assent, the return right does not apply.
This return right also does not arise if there was an opportunity to review the license before making the initial agreement. In subsection (b) the exposure to potential liability for expenses of reinstating the system after review creates an incentive for licensors to make the license or a copy available for review before the initial obligation is created. Subsection (b) does not apply to transactions involving software obtained on-line if the software provider makes available and obtains assent to the license as part of the ordering process. On the other hand, in a mail order transaction, if the license is first received along with the copy of the information that was ordered, subsection (b) applies. The return right under this section includes, but differs from the return right in Section 112(e). The return in Section 211 is cost free in that the end user receives reimbursement for reasonable costs of return and, in a case where installation of the information was required to review the license and caused adverse changes in the end user's system, to reasonable costs in returning the system to its initial condition. The fact that this section states an affirmative right in the mass market to a cost free refund does not affect whether under other law outside of this Act, a similar right might exist in other contexts.
Subsection (b) contemplates that the distribution method requires assent to a license after the initial agreement, there is an obligation to reimburse the licensee if it rejects the license. The expenses incurred in return of the subject matter of the rejected license must be reasonable and foreseeable. The costs of return do not include attorney fees or the cost of using an unreasonably expensive means of return or to airplane tickets, lost income or the like unless such expenses are required by instructions of the licensor. The expense reimbursement refer to ordinary expenses such as the cost of postage.
Similarly, in cases where expenses of restoring the system are incurred because the information was required to be installed in order to review the license, expenses chargeable to the licensor must be both reasonable and foreseeable. The reference here is to actual, out-of-pocket expenses and not to compensation for lost time or lost opportunity. The losses here do not encompass consequential damages. Moreover, they must be foreseeable. A party may be reasonably charged with ordinary requirements of a licensee that are consistent with others in the same general position, but is not responsible for losses caused by the particular circumstances of the licensee of which it had no reason to know. A twenty dollar software license provided in the mass market should not expose the provider to significant loss unless the method of presenting the license can be said ordinarily to cause such loss. Similarly, it is ordinarily not reasonable to provide recovery of disproportionate expenses associated with eliminating minor and inconsequential changes in a system that do not affect its functionality. On the other hand, the provider is responsible to cover actual expenses that are foreseeable from the method used to obtain assent.
SECTION 212. TERMS OF CONTRACT FORMED BY CONDUCT.
(a) Except as otherwise provided in subsection (b) and subject to Section 301, if a contract is formed by conduct of the parties, in determining the terms of the contract a court shall consider the terms and conditions to which the parties expressly agreed, course of performance, course of dealing, usage of trade, the nature of the parties' conduct, the records exchanged, the information or informational rights involved, the supplementary terms of this [Act] which apply to the transaction, and all other relevant circumstances.
(b) This section does not apply if the parties authenticate a record of the agreement or a party agrees, by manifesting assent or otherwise, to the record of the other party.
Uniform Law Source: Uniform Commercial Code: Section 2-207.
Definitional References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Court"; "Information"; "Informational Rights"; "Party"; "Record"; "Term".
1. Scope of the Section. This section deals with contracts formed by conduct and not by offer and acceptance in records. Of course, in most cases, contracts created based on conduct also involve an exchange records. If these form the contract or the parties agree to the terms of a record, this section does not apply. If the sole basis to conclude that a contract is formed lies in conduct, this section governs what are the terms of the contract.
Contracts formed by conduct arise in various settings. One is where the parties begin and complete performance without making an oral agreement and without reducing their agreement a record. Another involves a "battle of forms" that, under Sections 204 and 205 did not result in an effective offer and acceptance and neither party agreed to a record signifying terms of agreement.
2. Interpret based on Context. This section rejects the so-called "knock-out" rule in original Section 2-207(c) as too rigid for information transactions where contract terms may be essential to define the product. The section requires the court to define the contract terms by considering all commercial circumstances, including the nature of the conduct, the informational rights involved, and applicable trade usage or course of dealing. Given the fluid nature of the context, usage of trade and course of dealing have special importance and, as in any other context, these elements of the agreement can trump the supplemental default rules of this Act. Consideration of these 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 in this area. This rule allows courts to continue existing practice of considering all factors when attempting to determine the terms of an agreement formed by conduct, and does not impose an artificial or inappropriate legal regime.
3. Battle of Forms and Conduct. Some information transactions involve exchanges of inconsistent standard forms coupled with conduct of both parties indicating the existence of a contract. In these cases, one of two results may occur. The first is that a contract is formed and the terms are defined with reference to the forms, either because they do not materially disagree or because a conditional offer or acceptance in a record of one party was agreed to or otherwise adopted by the other party. Those cases do not fall within this section. The second possibility is that the records do not establish a contract or its terms because, for example, they materially disagree and neither party agreed to the record of the other. Such cases fall within this section. Subsection (a) directs the court to review the entire circumstances regardless of which form was first received or sent, but including the terms of the exchanged records and established trade usage, course of dealing, and course of performance as relevant circumstances.
Treatment of battle of forms transactions requires consideration of this section and of Sections 204 and 205.
4. Scope of License. In information transactions, contract terms relating to scope define the product being licensed. The same subject matter (e.g., one copy of software) has entirely different value and substance depending on what rights are granted none of which are necessarily obvious from the copy itself (the same copy may be a single-user product or for network use). That being true, it is especially important to give special deference to scope issues in a manner that protects the licensor's valuable property.
Under subsection (a), a court will consider all relevant circumstances. Those include the nature of the subject matter which, for computer information, typically will involve intellectual property. Where there is a significant disagreement about an important element of scope, however, a court be careful to not make a determination that creates rights or imposes obligations beyond those actually agreed by the parties because that in effect would transfer away valuable property of one party based on a judicial determination centered on unclear facts. That premise argues for rejecting any expansive interpretation of the meaning of otherwise ambiguous conduct. Absent a clear showing of agreement to the contrary, the court should consider the following principles: avoid a determination on the scope of the license which would:
(1) It should avoid creating a scope that requires the licensor to acquire rights that it did not own or have the right to license at the time of contracting, or that would exceed the rights and power that the licensor then had. Thus, if at the time the contract was created by conduct the licensor only had the right to grant a license limited to North America, the court should not interpret conduct of the parties as creating a scope including European rights or forcing the licensor into an infringement.
(2) It should avoid expanding the licensee's rights beyond the actual agreement of the parties. The decision 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 Europe should not lead the court to conclude that the bargain must therefore have included European rights simply because use in Europe occurred. Such an interpretation might encourage infringement by the licensee as a means of expanding rights. Good faith conduct by the licensee can be protected without creating a grant that may not have been intended by the licensor.
(3) It should avoid making the licensee liable for infringement because of conduct exceeding the scope, if such exercise was made at a time when the licensee reasonably and in good faith believed that its exercise of rights was within the agreed scope.
SECTION 213. PRETRANSACTION DISCLOSURES IN INTERNET TRANSACTIONS. A licensor that makes its computer information available to a licensee electronically from its Internet or similar electronic site affords an opportunity to review the terms of a standard form license that satisfies Section 112(e) with respect to a licensee that acquires 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 by:
(A) displaying 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 furnishing a copy of the standard terms on request before the sale or license of the computer information; and
(2) does not take affirmative steps to prevent downloading or copying of the standard terms for archival or review purposes by the licensee.
Uniform Law Source: none.
Definitional References: Section 102: "Computer information"; "Copy"; "Electronic"; "Information"; "License"; "Licensee"; "Licensor"; "Standard form". Section 112(e): "Opportunity to review".
1. Scope of Section. This section deals with pre-transaction disclosures of contract terms in transactions conducted on Internet involving formation of a contract on-line with an electronic delivery of the information. The section creates an incentive for disclosure of terms before initial agreement by indicating certain modes of disclosure that create an opportunity to review before the transaction.
2. Relation to Other Assent Rules. This section is intended to provide guidance for Internet commerce and an incentive for use of particular types of disclosures of terms. Failure to follow the procedures does not bear on whether the terms of a license are enforceable. That determination should be made under the general standards about manifestation of assent and opportunity to review set out in Sections 112 and 112(e).
3. Disclosure. The disclosure rules in this section are modeled after and adapt provisions of the Magnuson-Moss Warranty Act. They combine disclosure and availability. It is sufficient, however, that the terms be available on request. Thus, terms might be made available through a hyperlink on the particular site or through providing the potential licensee with an address (electronic or otherwise) from which the terms can be obtained.
4. Ability to Download. The safe harbor provided for in this section is met if, given all other conditions being satisfied, the licensor does not take affirmative steps to preclude downloading or copying of the terms of the agreement. This does not require that the licensor adopt technologies that enable downloading or copying, although most present technology does so. It does require that there be nothing further done to preclude the possibility of copying. Thus, for example, a licensor that takes 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.
SECTION 214. COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE. The commercial reasonableness of an attribution procedure is determined by the court. In making this determination, the following rules apply:
(1) An attribution procedure established by statute or regulation is commercially reasonable for transactions within the coverage of the statute or regulation.
(2) Except as otherwise provided in paragraph (1), commercial reasonableness is determined in light of the purposes of the procedure and the commercial circumstances at the time the parties agree to or adopt the procedure.
(3) A commercially reasonable attribution procedure may use any security device or method that is reasonable under the circumstances.
Uniform Law Source: Uniform Commercial Code: Sections 4A-201; 202.
Definitional References: Section 102: "Attribution procedure."
1. Scope of the Section. This section provides standards for determining if an attribution procedure is commercially reasonable.
2. Effect of a Commercially Reasonable Procedure. Attribution procedures are relevant with respect to several issues in electronic transactions. Use of an attribution procedure results in enhanced legal effect, however, only if the procedure is commercially reasonable. Sections 108, 215, and 216. Failure to use a commercially reasonable attribution procedure does not preclude a finding that authentication occurred or a finding regarding the identity of the sender or integrity of the record. It leaves the parties with general questions of proof.
3. Nature of an Attribution Procedure. This Act does not dictate what constitutes an attribution procedure. Evolving technology and commercial practice make it impractical to predict future developments and unwise to preclude developments by a narrow statutory mandate. This Act relies primarily on the parties to select an appropriate procedure.
In most cases, an attribution procedure is established by agreement or otherwise adopted by both parties. Assent is a predicate for the creation of procedures that affect substantive rights. A procedure of which one party is not aware does not qualify. See Section 215. On the other hand, parties dealing for the first time may adopt a procedure for authentication or other purposes.
In some cases, statutes or regulations define a particular methodology as an appropriate procedure. These laws, such as digital signature statutes, establish by law a procedure that qualifies as an attribution procedure in this Act. Under subsection (1), procedures established by another statute or regulation are per se commercially reasonable within the scope of their coverage.
4. Commercially Reasonable. The general requirement of commercial reasonableness is that the procedure be a commercially reasonable method of identifying the party as compared to other persons, a commercially reasonable method of detecting or preventing changes, or a commercially reasonable method of achieving any other purpose relevant to this Act and to which the procedure is addressed. This does not require state of the art procedures. Rather, the requirement that a procedure be commercially reasonable in order to attain enhanced legal recognition provides an incentive that encourages good practices and allows a court to provide a direct buffer against over-reaching. It protects parties who lack knowledge of technology and who use procedures established by others: if the procedure is found to be not commercially reasonable, it does not create any benefits under Section 215 or 216 for the party relying on the procedure.
What is a commercially reasonable procedure takes into account the choices of the parties and the cost relative to value of the transactions. How one gauges commercial reasonableness depends on a variety of factors, including the agreement, the choices of the parties, the then current technology, the types of transactions affected by the procedure, sophistication of the parties, volume of similar transactions engaged in, availability of feasible alternatives, cost and difficulty of utilizing alternative procedures, and procedures in general use for similar types of transactions. The concept is similar to that in Section 4A-202(c) of the Uniform Commercial Code. The quality of the procedure may reasonably be tailored to the particular transaction and the degree of risk involved. Additionally, if a procedure results from a fully negotiated agreement of the parties, it should receive deference in terms of its reasonableness applicable to their particular situations. This flows from the principle of assumed risk and that the parties' agreement should ordinarily be enforced. The same principle may apply if the two parties, aware of the risks of a particular procedure, nevertheless agree to use the procedure for a particular transaction. In effect, the parties here have concluded that it is commercially reasonable in their context to accept the risks.
SECTION 215. DETERMINING ATTRIBUTION OF ELECTRONIC EVENT TO PERSON; RELIANCE LOSSES.
(a) An electronic event is attributed to a person if it was the act of that person or its electronic agent, or the person is otherwise bound by it under the law of agency or other law. The party relying on attribution of an electronic event to another person has the burden of establishing attribution.
(b) If there is an attribution procedure between the parties with respect to the electronic event, the following rules apply:
(1) The effect of compliance with an attribution procedure established by other law or administrative rule is determined by that law or rule.
(2) In all other cases, if the parties agree to or otherwise knowingly adopt, after having had an opportunity to review the terms of an attribution procedure to verify the person from which an electronic event comes, the record is attributable to the person identified by the procedure, if the party relying on that attribution satisfies the burden of establishing that:
(A) the attribution procedure is commercially reasonable;
(B) the party accepted or relied on the electronic event in good faith and in compliance with the attribution procedure and any additional agreement with or separate instructions of the other party; and
(C) the attribution procedure indicated that the electronic event was that of the person to which attribution is sought.
(3) If the electronic event is not binding on a person under subsection (a) but is otherwise binding under paragraph (2), the person is nevertheless not bound under paragraph (2) for the electronic event if the person satisfies the burden of establishing that the electronic event was caused directly or indirectly by a person:
(A) that was not entrusted at any time with the right or duty to act for the person with respect to such electronic events or attribution procedure;
(B) that lawfully obtained access to transmitting facilities of the person and that access facilitated the misuse of the attribution procedure; or
(C) that obtained, from a source controlled by the person, information facilitating misuse of the attribution procedure.
(c) The provisions of subsection (b) may not be varied by agreement in a consumer contract except in a manner that provides greater protection to the consumer. In all other cases, the effect of an attribution procedure may be specified by agreement if the attribution procedure is commercially reasonable.
(d) If an electronic event is not binding on a person under subsection (a) and is not effective under subsection (b), the person identified as the source of the electronic event is nevertheless liable for losses of the other party measured by the cost of that party's performance in reliance if the loss occurs because:
(1) the person identified as the source failed to exercise reasonable care;
(2) the other party exercised reasonable care and reasonably relied on the belief that the person identified was the source of the electronic event because access materials, computer programs, or the like created the appearance that it came from that person; and
(3) the appearance on which the party relied resulted from acts of a third person that obtained the capability to create that appearance from a source under the control of the person identified as the source of the record.
Uniform Law Source: Sections 4A-202; 4A-205; UNCITRAL Model Law.
Definitional References: Section 102: "Access materials"; "Attribution procedure"; "Burden of establishing"; "Computer program"; "Electronic"; "Electronic agent"; "Electronic event"; "Good faith"; "Party"; "Person"; "Presumption".
1. Scope of the Section. This section deals with when an electronic event (e.g., authentication, message, record or performance) is attributed to a particular person. Attribution to a person means that the electronic event is treated in law as having come from that person. The section enables electronic commerce in an open environment, while stating reasonable standards to allocate risk. The section does not apply to funds transfers, bank accounts, credit card liability, or other subject matter outside the scope of this Act. It deals with an issue independent of whether the record has been authenticated. Authentication requires an act and an appropriate intent. Attribution deals with determining to whom the act is charged.
2. Subsection (a) clarifies that the party seeking to rely on attributing the source of an electronic event bears the burden of establishing that the record was the act of person or its authorized agent. The "burden of establishing" means "the burden of persuading the trier of fact that the existence of a fact is more probable than its non-existence." In effect, a vendor that desires to attribute an order to a particular party bears the risk of being able to do so.
This might involve use of agency law principles. In addition, the reference to "other law" 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 or this Act does bind her (e.g., under some state electronic signature statutes her contract with the issuer of the password can allocate liability to her, or a cause of action for negligence might exist in some circumstances) .
3. Subsection (b) deals with the effect of attribution procedures. The basic rule is that, unless the procedure used is "commercially reasonable", subsection (a) governs. Subsection (b), however, allows a party that relies on attribution procedure to establish attribution to the other party if, and only if, the relying party carries the burden of establishing that:
• The procedure used was commercially reasonable
• The procedure was relied on in good faith
• The procedure indicated that the party attributed with the record was the responsible person
The net effect of this is that the party seeking to establish attribution has the burden and risk of establishing actual attribution or the foregoing characteristics with respect to the procedure used. Under Section 102, an "attribution procedure" is a procedure established by law or adopted or agreed by the parties. That is, it is a procedure that the parties select by agreement.
The standard of commercial reasonableness has two functions and is essential to the basic theme of developing rules that are "technology neutral." The first function is that it establishes a standard for courts to develop case law and for parties to develop standards for the development of effective procedures. A rule that does not set out a standard of commercial reasonableness or similar concept in effect leaves courts with no standard to decide particular cases and, to the extent that it relies on jury or other fact findings in the absence of a substantive standard, does not provide a basis for the development of a relevant body of law to guide commerce. The second function is equally important. Regardless of the agreement of the parties, an attribution procedure has the designated effects only if it is commercially reasonable. This gives courts a basis to monitor transactions in order to prevent abuse.
Even if a relying party (e.g., vendor) establishes the three elements required under subsection (b), it does not succeed if the other party can establish that the message was not caused by a person:
• entrusted at any time with the right or duty to act for the person with respect to such electronic events or attribution procedure;
• who obtained access to transmitting facilities of the person; or
• who obtained, from a source controlled by the person, information facilitating breach of the attribution procedure.
The net effect of these rules is that the burden of establishing attribution is primarily on the party seeking to rely on the attribution. It must establish either that the party actually was the sender or someone authorized by the sender or that a commercially reasonable procedure, actually applied, indicated that this was true. Even then, the other party succeeds if it establishes the criteria under (b)(3).
SECTION 216. ATTRIBUTION PROCEDURE FOR DETECTION OF CHANGES AND ERRORS: EFFECT OF USE. If the parties use a commercially reasonable attribution procedure to detect errors or changes in an electronic event, the following rules apply:
(1) The effect of the procedure is determined by the agreement or, in the absence of agreement, by this section or any law establishing the procedure.
(2) Unless the circumstances indicate otherwise, if the procedure indicates that an electronic event has not been altered since a particular time, it is treated as not having been altered since that time.
(3) As to portions to which the procedure applies, if a procedure indicates that there is no error in content, an electronic event is treated at the time it was sent as having had the content intended by the person creating or sending it pursuant to the procedure.
(4) If the sender has conformed to the procedure but the other party has not and the nonconforming party would have detected the change or error had that party also conformed, the sender is not bound by the change or error.
Definitional References: Section 102: "Attribution procedure"; "Electronic"; "Electronic message"; "Electronic event"; "Party"; "Person"; "Record"; "Send".
1. Scope of the Section. This section deals with the effect of using a commercially reasonable attribution procedure for the detection of errors or changes in electronic events. It creates default rules in terms of rebuttable presumptions and recognizes that these can be varied by agreement. The presumptions do not arise if the procedure is not commercially reasonable.
2. Effect of Agreement and Presumptions. If the parties use a commercially reasonable attribution procedure, an electronic event (e.g., authentication, message, record or performance) created, transferred or stored in compliance with that procedure is entitled to enhanced legal recognition. The effect of a commercially reasonable procedure can be determined by agreement or by applicable law or regulations outside this Act. In their absence, use of the commercially reasonable procedure creates a presumption regarding the accuracy or unchanged nature of the record. The presumptions are limited to issues to which the procedure applies. Other presumptions may be appropriate depending on the nature of the procedure. This section does not foreclose their development by courts.
The procedure must be commercially reasonable and must have been agreed to or adopted by the parties or created by other law. The principle here hinges on agreement and general considerations of commercial reasonableness. It is technology neutral. Ultimate proof or disproof of alleged errors is left to law outside this Act. The common law of mistake applies as do cases on the legal consequences of garbled or forged transmissions.
3. Failure to Use. Subsection (4) deals in a limited way with the effect of a failure of one party to conform to an attribution procedure that is commercially reasonable. If the sender complies, but the recipient does not, the sender is not bound by an error that would have been detected through compliance by the recipient.
4. Commercially Unreasonable Procedures. If the procedure is not commercially reasonable, its effect is determined by other law.
SECTION 217. ELECTRONIC ERROR: CONSUMER DEFENSES.
(a) In this section, "electronic error" means an error in an electronic message created by a consumer using an information processing system when a reasonable method to detect and correct or avoid the error was not provided.
(b) 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 or of the other party's reliance on the message, whichever occurs first:
(A) notifies the other party of the error; and
(B) causes delivery to the other party of all copies of the information or, pursuant to reasonable instructions received from the other party, delivers to another person or destroys all copies; and
(2) has not used or received any benefit from the information or caused the information or benefit to be made available to a third party.
(c) If subsection (b) does not apply, the effect of an error is determined by other law.
Prior Uniform Law: None.
Definitional References: Section 102: "Automated transaction"; "Consumer contract"; "Copy"; "Delivery"; "Electronic"; "Electronic message"; "Good Faith"; "Information"; "Information processing system"; "Informational Rights"; "Notifies"; "Party"; "Receive".
1. Scope of the Section. This section creates a statutory electronic error correction procedure that supplements common law concepts of mistake. The section does not displace general common law concepts of mistake which continue to apply in electronic contexts and in other cases of error. To use the defense, the consumer must act promptly to avoid or minimize harm or loss to the other party. This section does not alter law concerning transactions that do not involve a consumer.
2. Electronic Errors: Defined. Electronic errors contemplate situations in which a consumer causes an error in an electronic event or message. The rule adopted here allows the consumer, by prompt action, to avoid the effect of its mistake. The defense does not apply if the system itself reasonably provides a means to correct errors. Thus, a consumer's mistake in entering 100 as the quantity of copies desired may constitute an electronic error, but it does not come within this definition if the ordering system requires confirmation of the quantity and reasonably allows the consumer to correct an error before sending the order. The rule here thus provides an incentive to create error-correction procedures and provides protection to the consumer where such procedures are not made available.
What is a reasonable means to correct errors depends on the commercial setting, including the extent to which it entails immediate reaction time. For example, in an electronic transaction which occurs over several days and not in real time, it may be reasonable to require a verification of a bid before it is placed, while in an on-line, real time auction, reconfirmation may not be possible. A reasonable procedure may entail no more than requiring two indications that the bid should be placed.
3. Avoiding the Effect of Error. If an electronic error occurs, the rule allows a consumer to avoid responsibility for unintended messages if the consumer acts promptly. The message must not have been intended. Error avoidance is not a procedure to rescind a contract because the consumer has second thoughts. The procedure creates a means to avoid the complexity and uncertainty of relying on common law principles about mistakes. Under common law, in many instances of a unilateral mistake, the party making the error is responsible for its consequences. This section creates a consumer protection that avoids such decisions.
To avoid the effects of an electronic error, the consumer must act promptly on learning of the error or of the other party's reliance. The consumer must notify the other party of the error and deliver back, at the consumer's own cost, any copies of the information received 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 in a manner that promptly returns the other party to the position that would have been true if the error had not occurred. Compare EU Distance Contracts Directive (no rescission right for consumer if software returned unopened).
This concept builds on equity principles that allow a party to avoid the adverse consequences of its error if the error causes no detrimental effect on another party and does not produce a benefit for the person making the mistake. It does not apply if the consumer has used or otherwise received a benefit from the erroneous order. If the consumer acts promptly to minimize the adverse effects, this section allows the consumer to vitiate the effect of the mistake. The defense is grounded in equity principles. Of course, since there will be unavoidable detrimental effects on the party who received an erroneous message (e.g., costs of filling erroneous orders), courts should apply this rule with care. The basic assumption that there is no detrimental effect on the person who did not cause the error is particularly suspect if manufacturing, production, delivery or other costs are significant. Also, a vendor who fills erroneous orders in a just-in-time inventory system can incur considerable costs for products such as computers or cars; where the product is information, the premise is that the lesser cost of manufacturing and delivery justifies the rule.
Illustration 1: Consumer intends to order ten games from Jones. In fact, he types 110. The electronic agent maintaining Jones' site electronically disburses 110 games or causes their placement 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 or destroy copies at his expense; he does not use the games. Under this section, there is no contract obligation for 110 copies. Jones bears the loss of the initial air courier costs and inventory, order and return processing.
Illustration 2: Same facts as in Illustration 1, except that Consumer did order 110 copies and merely changed his mind. The conditions for application of this section are not met.
Illustration 3: Same as in Illustration 1, but Jones' system asks Consumer to confirm an order of 110 copies. Consumer confirms. There was no "electronic error" since the procedure reasonably allowed for correction of the error. The conditions for application of this section are not met.
4. Transactions Not With Consumers. This section does not alter common law in transactions that do not involve consumers. The section does not apply when consumers use electronic agents, as the confirmation solution would be meaningless in that context (an electronic agent would likely reconfirm the same error). As for commercial transactions, their diversity make a simple rule inappropriate because of the far different patterns of risk and the greater ability of commercial parties to develop tailored solutions to this problem. A court addressing electronic errors in these other contexts should apply general common law, including an inquiry about whether any contract was actually formed. The existence of this remedy in this section for a consumer does not indicate that other remedies under the law of mistake are precluded.
SECTION 218. ELECTRONIC MESSAGE: WHEN EFFECTIVE; EFFECT OF ACKNOWLEDGING.
(a) An electronic message is effective when received, even if no individual is aware of its receipt.
(d) 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 References: Section 102: "Electronic message"; "Information"; "Receive".
1. Scope of the Section. This section deals with the timing and effectiveness of electronic messages. It rejects the mailbox rule for electronic messages. It also deals with the impact of a request for an acknowledgment. The section does not deal with questions of to whom the message is attributed or with liability for errors. Sections 215 and 216.
2. Time of Receipt Rule. Subsection (a) adopts a time of receipt rule; rejecting the mail box rule for electronic messages. This reflects both the relatively instantaneous nature of electronic messaging and places the risk on the sending party of ensuring that receipt occurs. What rule applies in common law to modern messaging system is not clear. Here, the message is "effective" when received. Being effective, however, does not create a presumption that the message contains no errors. If errors are present, general law of mistake and Section 216 determine the outcome.
The message is "effective" when received, not when read or reviewed by the recipient, just as written notice can be deemed received even if not read or acknowledged. This applies traditional theories of assent and notice to electronic commerce. In electronic transactions, automated systems can send and react to messages without human intervention. A contract rule that demands direct human assent would inject an inefficient and error prone element in the modern electronic format.
3. Effect of Acknowledgment. Acknowledgment is not acceptance, although an acceptance can be a sufficient recognition also to be treated as an acknowledgment. Acknowledgment confirms receipt. In electronic systems, this often occurs automatically on receipt of the electronic message in the recipient's system.
This section does not create presumptions other than that an acknowledgment indicates that the message was received. Questions about accuracy of the received message and about time of receipt, and content are not treated here. Of course, by agreement the parties can alter this result.
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 such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented by:
(1) course of performance, course of dealing, or usage of trade; and
(2) evidence of consistent additional terms, unless the court finds the record to have been intended as a complete and exclusive statement of the terms of the agreement.
Uniform Law Source: Uniform Commercial Code: Sections 2A-202; 2-202.
Definitional References: Section 102: "Agreement"; "Court"; "Party"; "Record"; "Term".
1. Scope of Section. This section sets out the parol evidence rule taken directly original Article 2 of the Uniform Commercial Code.
2. Practical Construction. Paragraph (1) makes admissible evidence of course of dealing, usage of trade, and course of performance to explain or supplement the terms of any record stating the agreement of the parties. This rejects the rule that such evidence cannot be considered unless the court makes a determination that the language of the record is ambiguous. Instead, these sources of interpretation are allowed in order to reach a true understanding of the intent of the parties as to their agreement. Records of an agreement are to be read on the assumption that the course of prior dealings between the parties and the usage of trade were taken for granted when the record was drafted. Unless carefully negated by the record, they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties may be the best indication of what they intended the record to mean.
3. Consistent Additional Terms. Under paragraph (2), consistent additional terms not reduced to a record may be proved unless the court finds that the record was intended by both parties as a complete and exclusive statement of all the terms. This rejects the view that any record that is final on some terms should be, without more, taken as including all terms of the agreement. On the other hand, if alleged additional terms are such that given the circumstances of the transaction, if agreed upon, they would certainly have been included in the record of the agreement, evidence about the alleged terms must be kept from the trier of fact under this standard.
In many cases, evidence of the 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 practice to include a merger clause stating that the record is intended by both parties as a complete and exclusive expression of the terms of the contract. 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, however, 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.
4. Contradictory Terms or Agreements. This section follows original Article 2 and excludes evidence of alleged terms or agreements that contradict the terms of a record intended as a final expression of the agreement or the terms on which confirmatory memoranda agree. An alleged term or agreement is contradictory if its substance cannot reasonably co-exist with the substance of the terms of the record. Thus, an alleged term that calls for completion of a software project on July 1 contradicts a term of a record calling for completion on June 10. The two terms cannot reasonably co-exist as part of the same agreement. On the other hand, an alleged term that specifies the processing capacity of the software does not contradict the terms of a record that does not reference that issue. Of course, the fact that the term does not contradict the record means only that evidence of it can be admitted. It does not indicate whether the alleged term was actually agreed to by the parties.
This rule does not preclude proof of modifications of the agreement. What is excluded is evidence of prior or contemporaneous agreements that are not in record. Modification may be shown by appropriate evidence. Of course, as indicated in Section 303, terms of the original record may restrict what subsequent modification may be proven or effective, such as by requiring that all modifications be in an authenticated record.
SECTION 302. PRACTICAL CONSTRUCTION.
(a) The express terms of an agreement and any course of performance, course of dealing, and usage of trade must be construed whenever reasonable as consistent with each other. However, if such 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) 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) Evidence of a relevant usage of trade, course of performance or course of dealing 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) The existence and scope of a usage trade are to be proved as facts.
Uniform Law Source: Uniform Commercial Code: Section 2A-207; Section 2-208; Section 1-205. Revised.
Definitional References: Section 102: "Agreement"; "Contract"; "Course of dealing"; "Course of performance"; "Knowledge"; "Usage of trade". Uniform Commercial Code: "Party": Section 1-201; "Term": Section 1-201;
1. Scope of the Section. This section conforms to Sections 1-205 and 2-208 of the Uniform Commercial Code. In interpreting an agreement a court should refer to relevant indicia of 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 have 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, beyond that, course of performance provides an important component of the factors that determine the meaning of the "agreement" of the parties. Consistent with modern law, under this Act, course of performance (as well as usage of trade and course of dealing) are relevant to determine the meaning and content of the agreement.
3. Nature of Course of Performance. A course of performance requires repeated performance by one party known to the other, an opportunity of the other to object, and a pattern of acceptance or acquiescence by that other party. Since it provides a basis for understanding the agreement of the two parties, the events creating it must have mutual elements. Unilateral conduct unknown to the other party, such as by making uses of information beyond the terms of a license, cannot establish a course of performance. Similarly, a single occasion of conduct does not fall within this concept, although a single event may affect the parties' rights in other respects.
4. Relationship to Waiver. A particular pattern of action may provide insight into the meaning of the agreement or represent a waiver of a term of an agreement. The preference is in favor of a "waiver" (if the elements of waiver are present) whenever this construction is reasonable because this preserves the flexible character of commercial contracts and prevents surprise or other hardship. A waiver by conduct may be retracted as to future conduct. An interpretation of the agreement measures the meaning of a contract binding on both parties and which cannot be retracted by one.
5. Order of Interpretation. Subsection (b) sets out the order of preference in interpreting an agreement among express terms, course of performance, course of dealing, and usage of trade. Express terms always govern. Course of performance and course of dealing are the next preferred, respectively, because each relates to the behavior of the particular parties.
SECTION 303. MODIFICATION AND RESCISSION.
(a) An agreement modifying a contract subject to this [Act] needs no consideration to be binding.
(b) 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) The modification and the contract as modified must satisfy the requirements of Sections 201(a) and 307(g) if the contract as modified is within these provisions.
(d) An attempt at modification or rescission which does not satisfy subsection (b) or (c) may operate as a waiver if Section 702 is satisfied.
Uniform Law Source: Uniform Commercial Code: Sections 2A-208; 2-209.
Definitional References: Section 102: "Agreement"; "Authenticate"; "Consumer"; "Contract"; "Merchant"; "Record"; "Standard form"; "Term".
1. Scope of the Section. This section deals with the effectiveness of modifications of contracts and of agreed limitations on the ability to modify. It is subject to Section 304 on changes in terms of an on-going contract pursuant to contract terms allowing changes. The section generally follows original Section 2-209 of the Uniform Commercial Code, but provisions on the relationship between an attempted modification and an effective waiver are moved to Section 702 on waiver.
2. Role of Contract Modifications. Subsection (a), as in original Article 2 of the Uniform Commercial Code, makes effective modifications of contracts without regard to technicalities and complex issues of lack of consideration. The Restatement is consistent. An agreement to modify a contract needs no consideration to be binding. The modification must be in an agreement, indicating assent by both parties. As in original Article 2 of the Uniform Commercial Code, this section does not require 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. However, there must be agreement; this protects against over-reaching and extortion-like demands in cases of abuse, applying a concept like that of good faith to prevent dishonesty in this setting. This Act does not alter existing case law.
Section 304 deals with a related, but distinct issue involving modifications. That section concerns the effect of contractual provisions allowing one party to make changes in the terms of continuing contractual relationships. Such terms must, of course, be part of an agreement. However, once the procedure and right are agreed to, the particular modifications made pursuant to the procedure do not require additional agreement to be effective.
3. Contract Terms Prohibiting Oral Modification. Subsection (b) conforms to prior law by generally allowing enforcement of a contract term that bars modification or rescission of an agreement except in an authenticated record. It also continues the policy that, because of the nature of consumer transactions, such terms should be enforceable only if the consumer assents to it by manifesting assent to the term. Original Article 2 of the U.C.C. required a consumer to sign the term. Both standards require specific indication of assent to the term, but the manifested assent requirement better fits modern electronic commerce.
A modification or rescission includes abandonment or other change of a term or contract by mutual consent. It does not include unilateral acts that terminate or cancel a contract.
In practice, prevention of modifications not contained in an authenticated record plays an important role in preventing false allegations of oral modifications, difficulties of establishing the terms to which parties are bound, and avoiding circumvention of express agreements through later provision of new terms in a standard form that does not require or obtain an authorized authentication by the recipient. For example, a "no oral modification" term should prevent modification of a basic agreement through a later provided mass-market license that is not authenticated by the party receiving the license. Morgan Laboratories, Inc. v. Micro Data Base Systems, Inc., 41 U.S.P.Q.2d 1850 (N.D. Cal. 1997). Such agreements are effective to preclude modifications not consistent with their requirements. This permits parties to make their own statute of frauds and to control their risk as regards any claims of modification after the agreement has been stated in a record.
A party whose language or conduct is inconsistent with a contract term requiring a signed record may place itself in a position from which it may no longer assert that term. But this is true only if the language or conduct induced the other party reasonably and in good faith to 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-oral waiver clause. Courts should be slow to find waiver of anti-waiver provisions in general. 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 circumstances constitute 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. In any event, a waiver can be retracted as to future performance by reasonable notice that the original terms of the agreement are to be complied with.
4. Statute of Frauds. Subsection (c) follows and clarifies existing law. The contract as allegedly modified and the modification itself must satisfy the statute of frauds and Section 307(g) to be enforceable. This places a barrier against unfounded claims of oral modification that alter the contract in a form that derogates Section 201(a) requirements for an authenticated record or that alters the requirements of Section 307(g).
Thus, the alleged modification cannot, without an authenticated record, transform a $6,000 two year license of software into a perpetual license, nor can it alter the subject matter of a film clip license to include an entirely different clip outside the subject matter referenced in the original record. On the other hand, a modification that changes the delivery date for the same license, 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 term, 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 the Section 201 constitutes the contract of the parties.
5. Other Restrictions. The modifications must, of course, also satisfy any other applicable rules limiting the effectiveness of agreed terms. Thus, disclaimers of warranties must conform to the disclaimer rules in Section 406. Modifications of scope must comply with Section 307(g).
SECTION 304. CONTINUING CONTRACTUAL TERMS.
(a) Terms of a contract involving successive performances apply to all performances unless the terms are modified in accordance with this [Act] or the contract, even if the terms are not displayed or otherwise brought to the attention of a party with respect to each successive performance.
(b) If a contract provides that it may be changed as to future performances by compliance with a described procedure, a change proposed in good faith pursuant to that procedure becomes part of the contract if the procedure:
(1) 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) The parties by agreement may determine the standards for reasonable notice unless the agreed standards are manifestly unreasonable in light of the commercial circumstances.
Definitional References: Section 102: "Agreement"; "Contract"; "Good faith"; "Mass-market license"; "Notice"; "Party"; "Term"; "Termination".
1. Scope of the Section. This section deals with contracts involving successive performances by one or both parties. Information contracts frequently contemplate long-term, ongoing relationships that need to be modified over time. This section clarifies the enforceability of agreed methods allowing changes in terms in on-going performance.
2. Continuing Terms. Subsection (a) states the simple principle that contract terms, if enforceable, cover all contractual performance. This principle applies in any case where subsequent performances are covered by prior agreement. Thus, for example, a warranty disclaimer effectively created at the outset of a contract for use of a website applies to all subsequent performances and uses under that contract.
3. Changes in Terms. Subsection (b) addresses important practices in online and other continuing contracts, such as outsourcing contracts. In long term contracts of this type, changes frequently occur in the terms of service. Separate notice or negotiation of each change is often not feasible or desired by the parties, especially in cases where the change affects large number of users of an on-line system. Commercial practice often accommodates the desire for an efficient method of making changes by providing in the original agreement for a right of one party to alter terms during the contract period. This is a common provision in on-line service agreements where the contracts of most access or information providers provide that terms of service may be altered by posting changes in a particular location or file and that posted changes are effective when posted or at a later point in time. Subsection (b) authorizes two contractual procedures that create effective changes. This does not preclude other methods or imply that other contractual arrangements are not enforceable. Section 106.
This subsection deals with agreements that permit unilateral changes in terms. It does not deal with contracts that provide for periodic adjustments based on some agreed standard, such as an applicable cost of living or price index. Stiles v. Home Cable Concepts, Inc., 994 F. Supp. 1410 (M.D. Ala. 1998). Also, it does not create a unilateral right to change terms when the parties have not previously agreed that one party may make changes.
Contract terms that allow unilateral changes are in effect the converse of contractual provisions that restrict the ability of parties to modify a contract other than in a record authenticated by both. They are analogous to cases in which the agreement leaves the particulars of performance to be specified by one party. Section 305. The need for and enforceability of such changes is recognized in other areas of law. See FRB Regulation Z, 12 CFR § 226.5b. It is especially important in electronic commerce to recognize this right because this area of commerce is subject to evolving rules and circumstances that are not predictable, but may require adjustment of performance, risk allocation, and other characteristics of the relationship. This would include, for example, changing terms concerning rights of parental control over access by minors to particular types of information. As the law and regulations change, the provider of the information service must be able to make corresponding changes in its terms and conditions of service.
The interests of the other party are protected by the general obligation of good faith which restricts the actions of the party given the right to change contract terms, and by the fact that the change right was granted by a contract to which the affected party agreed. Also, in some cases, the contracts involving such provisions may be subject to termination at will or at brief intervals (e.g., monthly).
a. Relationship to Other Rules. The change procedures described in subsection (b) must be changes made pursuant to a contract term authorizing changes. The terms of an on-going contract may, of course, be effectively altered in other ways. For example, the parties may agree to modify the contract. This Act allows such modifications without consideration. Similarly, general principles of waiver and rules on the effect of course of performance may affect the enforceable terms of the agreement.
b. Contractual Procedures: Commercial Contracts. Subsection (b)(1) provides that, in non-mass-market contracts, a unilateral change becomes part of the contract if it is made pursuant to a contractually authorized procedure that reasonably notifies the other party of the change. The change must be in good faith and must be commercially reasonable. In determining whether a change was in good faith, however, the mere fact that the change adversely affects the other party does not, in itself, indicate bad faith if the change is within general standards of commercial fair dealing or the reasonable expectations of the commercial context.
Subsection (b)(1) requires that the procedure reasonably notify the other party of the change, but does not create other limitations on what contract terms are appropriate. Commercial agreements cover a wide range of contexts and economic or other commercial considerations can properly yield different contractual procedures in different settings. For example, in an out-source contract, the provider may make significant investments in systems relying on the five year contractual term and pricing of the contract, but the circumstances may require reservation of the right to change terms as technology changes. In such contracts, notice is appropriate, but it would not be appropriate to require (absent a contrary agreement) a blanket rule that the change yield a right to withdraw from the contract. The requirement that the change be made in good faith prevents the party making the change from taking undue advantage.
What reasonably notifies the party of changes depends on the circumstances. Posting at a location used for that purpose ordinarily suffices even though individual changes are not separately singled out unless they are especially material, such as price. In many cases, reasonable notification requires action before the change is effective, but in some emergency situations, notice that coincides with the change or follows the change would be sufficient (e.g., blocking access to a virus infected site, or a change in access codes to prevent on-going third party intrusions). See 12 C.F.R. § 205.8(a)(2) as an example. A procedure that calls for posting changes in an accessible location of which the other party is aware will ordinarily satisfy this requirement. See, e.g., Federal Reserve System, Interim Rule, 63 F. Reg. 14528 (March 25, 1998) (designation of an agreed electronic location for giving notice would ordinarily satisfy delivery requirement).
c. Mass-Market Transactions. Subsection (b)(2) deals with mass-market transactions. The standards of good faith and notification apply. In addition, the procedure must not only have been contractually authorized, it must also permit the licensee in good faith to withdraw from the contract with respect to future performances. This additional element is not appropriate as a rule for general commercial contracts. The termination right must be exercised in good faith and extends only to changes that are material and adverse to the licensee. Price is a material term in all cases. Other changes may be, such as a significant change in the agreed hours during which the on-line system is available. Of course, a reduction in price or other beneficial change does not require a right to terminate. Also, this section does not apply where a price or other change is based on an agreed standard to be used periodically to update contract terms.
Withdrawal is without penalty, but the licensee must, of course, perform the contract to the date of withdrawal (e.g., pay all sums due at that time). In many mass-market licenses that entail continuing performance, the contract itself may be subject to termination at will under Section 308. Subsection (b) does not alter that result.
4. Changes in Content. This section deals with changes in contract terms and does not cover changes in the content made available under an access contract, such as a contract providing access to multifaceted databases. In an access contract, the agreement grants rights to materials as changed by the licensor over time. Thus, unless an express contract term provides otherwise, a decision to add, modify, or delete a database or a part of a database does not modify the contract, but merely constitutes 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) Specification must be made in good faith and within limits set by commercial reasonableness.
(2) If a specification materially affects the other party's performance but is not seasonably made, the other party:
(A) is excused for any resulting delay in its performance; and
(B) may perform, suspend performance, or treat the failure to specify as a breach of contract.
Uniform Law Source: Uniform Commercial Code: Section 2-311.
Definitional References: Section 102: "Agreement"; "Contract"; "Good faith"; "Seasonble"; "Party".
1. Subsection (1) deals with circumstances in which the contract gives one party the right to specify terms. This language, which comes from original Section 2-311 of the Uniform Commercial Code, is an express recognition of one form of layered contracting in which terms are established after the initial agreement, rather than simultaneously with the initial agreement. If the other terms of the initial agreement are sufficiently definite to be a contract, this section allows parties to leave particulars of performance to be filled in by either of them without running the risk of having the contract invalidated for indefiniteness. The party to whom the agreement gives power to specify the missing details is required to exercise good faith and to act in accordance with commercial standards so that there is no surprise and the range of permissible specifications is limited by what is commercially reasonable. This section is an application of some of the layered contracting themes adopted in this Act.
The "agreement" which permits one party so to specify may be found in a course of dealing, usage of trade, implication from the circumstances or in explicit language used by the parties. Thus, acquisition of information through a telephone order where there is reason to know that a license provided by the other party will indicate the details of the contractual arrangement may fall within this section. The details thus supplied are bounded by trade use and commercial expectations, as well as by the terms actually agreed by the parties.
2. Subsection (2) applies when specification by one party is necessary to or materially affects the other party's performance, but is not seasonably made. The section excuses the other party's resulting delay in performance and the duty to perform. The hampered party may 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 can not 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 References: Section 102: "Agreement"; "Party".
1. This section follows original Article 2 of the Uniform Commercial Code and the emphasis of this Act on construction of contracts based on the commercial context. If the agreement and this Act do not provide content for a term left open by the parties, a court will use a standard of performance that it reasonable in light of the commercial circumstances. This rule applies only if there is no agreement on the term. Agreement may be found in express language or in a term implied from the contractual circumstances, usage of trade or course of dealing.
2. If the dominant intent of the parties is to have an agreement, that agreement does not fail merely because some terms are not expressly dealt with. Section 202. This does not create a contract where no contractual intent existed. If a term is left open because there was no agreement on the term and the intent of the parties precludes a contract unless or until that agreement occurs, subsection (a) does not apply. See Section 202(e).
3. What is reasonable in such cases depends on the nature, purpose and circumstances of the action to be taken or avoided and on the entire commercial context of the agreement. If the reasonableness standard applies, a party is not required to fix, at peril of breach, a time or performance that is in fact reasonable in the unforeseeable judgment of a later trier of fact. In such cases, under general requirements of good faith, effective communication by one party to the other of a proposed time limit or other interpretation of a reasonable performance calls for a response so that a failure to reply in a timely manner creates an inference of acquiescence to the proposal. If the recipient of the proposal objects to the proposal, however, or if no proposal is made, a demand for assurance on the ground of insecurity may be made under this Act pending further negotiation. Only if a party insists on undue delay or unreasonably early performance or rejects the other party's reasonable proposal does a question of breach arise under this subsection.
SECTION 307. INTERPRETATION AND REQUIREMENTS FOR GRANT.
(a) A license grants:
(1) the rights that are expressly described; and
(2) the right to use any all informational rights within the licensor's control at the time of contracting which are necessary in the ordinary course to exercise the expressly described rights.
(b) If a license expressly limits use of the information or informational rights, use in any other manner is a breach of contract. In all other cases, a license contains an implied limitation that the licensee will not use the information or informational rights other 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) An agreement that does not specify the number of permitted users permits a number of users which is reasonable in light of the informational rights involved and the commercial circumstances existing at the time of agreement.
(d) Neither party is entitled to any rights in new versions of, or improvements or 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.
(e) 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.
(f) Terms dealing with the scope of an agreement must be construed under ordinary principles of contract interpretation in light of the informational rights and the commercial context. In addition, the following rules apply:
(1) A grant of "all possible rights and for all media" or "all rights and for all media now known or later developed", or a grant in similar terms, includes all rights then existing or later created by law and all uses, media, and methods of distribution or exhibition, whether then existing or developed in the future and whether or not anticipated at the time of the grant.
(2) A grant of an "exclusive license", or a grant in similar terms, means that:
(A) for the duration of the license, the licensor will not exercise, and will not grant to any other person, rights in the same information or informational rights within the scope of the exclusive grant; and
(B) the licensor affirms that it has not previously granted those rights in a contract in effect when the licensee's rights may be exercised.
(g) The rules of this section may be varied only by a record that is sufficient to indicate that a contract has been made and 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 210 or 211.
Definitional References: Section 102: "Agreement"; "Authenticate"; "Contract"; "Copy"; "Delivery"; "Information"; "Informational rights"; "License"; "Licensee"; "Licensor"; "Party"; "Receive"; "Scope"; "Term".
1. Scope of the Section. This section deals with a variety of significant interpretation issues, establishing a basic premise that a license is interpreted in a commercially reasonable manner, but providing specific interpretation rules that reflect commercial practice.
2. License Grant Terms. Subsection (a) recognizes that a license gives the contractual rights expressly contained in it and, in appropriate cases, limited implied rights necessary to use the expressly granted rights. The reference in subsection (a)(1) is to contractual rights relating to information or informational rights.
Subsection (a)(2) adopts the reasonable interpretation that an express grant implies a grant of all rights necessary to exercise that express grant to the extent that such rights are within the control of the licensor. For example, a license to use a photograph in a digital product implies a right to transform that photograph into digital form. A license of software to create visual presentations for public speaking implies a right to publicly display images from the software in such presentations because that right is necessary to the expressly granted right. The implied rights, however, pertain only to right, 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. Additionally, the implied rights must be necessary to the express grant and do not include rights merely because they are desired, common or even helpful, unless necessary to the expressly granted uses. Express terms, of course, over-ride any implied rights
Subsection (a) expresses a contract law interpretive rule. Some copyright license cases hold that federal policy requires interpretation of the scope of a license against the licensee and in a manner that withholds any use not expressly granted. SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9th Cir. 1989). The better view as adopted here is that applied in cases such as Bourne v. Walt Disney Co., 68 F.3d 621 (2d Cir. 1995), which treat interpretation issues as ordinary commercial contract questions. Of course, to the extent a mandatory federal policy precludes different state law on this issue, that policy over-rides the standard in subsection (a).
3. Exceeding the Grant. Subsection (b) resolves what interpretation is given to a license that gives the licensee a right "to do X." It adopts the most commercially reasonable interpretation, i.e., that uses which exceed X (the grant) or differ from X breach the contract. This refers to the grant as interpreted, including consideration of course of dealing, usage of trade and the implied rights under subsection (a).
Uses differing from the grant are a breach of contract. This is clear under all case law if the licensed scope allows the licensee "only to do X" or otherwise precludes other uses. The first sentence of subsection (b) confirms this. Of course, if fundamental public policy or other restrictions on the enforceability of such terms apply, the contract limitation may not be enforceable. See Section 105.
If the word "only" or its equivalent does not appear, some patent license cases hold that uses not covered by the grant infringe the patent, but may not breach the license. These decisions deal with contract interpretation, rather than over-riding public policy. Independent of infringement issues with which the cases deal, as a matter of contract law, a rule that hinges on the use or failure to use the word "only" provides a true trap that is avoided in subsection (b) by adopting the ordinary commercial understanding that an affirmative grant implicitly excludes uses that exceed or are not otherwise within the grant.
The implied limitation, however, is not as strong as an express contract term of limitation. The implied limitation does not yield a breach of contract if the use would have been permitted by law in the absence of the implied limitation. Thus, scholarly use of a quotation from licensed material not subject to trade secrecy restraints, if a fair use under federal law, would not conflict with the implied limitation. However, even if a license does not use the magic word "only" and gives a right to use software at a designated location, a licensee that does something that is not included in that grant, such as making multiple copies for sale infringes the copyright and 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.
Illustration 1: LR licenses copyrighted software to LE. The license is silent on reverse engineering, but grants the right to use the software in a 1,000 person network. LE reverse engineers the software to examine the code. The use is not a breach if it would be a fair use in the absence of the implied limit. Use in a 2,000 person network, however, breaches the express limitation.
4. Number of Users. A license can specify the number of permitted users or uses. In the absence of agreed terms, the contract authorizes a number that is reasonable in light of the informational rights and commercial circumstances involved. In some cases, especially in the mass market, a single user limitation would be assumed for a computer program. In other contexts, multi-use or network use concepts are more appropriate. Given the diversity of the modern marketplace, no single presumed number of users or uses would fairly meet all circumstances. In making the commercial determination required by the general rule, however, the nature of the underlying information rights must be considered.
Of course, as with all default rules in this Act, this provision is subject to contrary agreement, which agreement may be found as well in express terms as in course of dealing, usage of trade and course of performance. Thus, an agreement for ten simultaneous users is not affected by this subsection. Similarly, if the parties agree that all persons at a designated site may be simultaneous users, that agreement controls and the reasonable number of users described here is not applicable.
5. Improvements and Design Material. As a basic presumption, and unless the contract clearly indicates otherwise, neither party receives a contract right to receive subsequent modifications or improvements made by the other, or a contract right of access to design and confidential material. Arrangements for contractual rights in modifications, improvements, source code or designs entail separate valuable relationships to be handled by express contract terms. In the absence of express terms, the contract gives no rights to such material. This contract law principle does not, of course, supplant intellectual property rules on derivative works. Section 105(a). The contract principle is independent of the implied license in subsection (a) which applies only to materials and information delivered to the licensee.
This section takes no position on what constitutes an improvement of an existing product or what constitutes a new product for purposes of applying contractual terms creating an obligation to provide improvements. That issue ultimately turns on the agreement.
6. Grant Clauses. Subsection (f) states that ordinary commercial contract principles apply to interpreting a grant. This resolves questions of whether, under state law, policy considerations require an interpretation that favors the licensor and precludes a grant of rights unless the grant is express. As a state law rule, of course, it is subject to contrary federal policy which, some courts hold, requires interpretation in favor of the licensor to protect intellectual property rights. Section 105.
Subsections (f)(1) and (f)(2) provide guidance on interpreting common and important license terms. Subsection (f)(1) adopts the majority rule on whether a grant covers future technologies and all rights. This is ultimately a fact sensitive interpretation issue. But use of statutory language or other language that implies a broad scope for the grant without qualification should be sufficient to cover any and all rights (such as the right to copy, modify, publicly perform and the like) as well as present and future media (such as print, television, and other modes of distribution). This is subject to the other default rules in this 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 point of this interpretation rule is not to encourage use of such broad grants, but to indicate what language achieves the indicated result. In many cases, the licensor will not be willing to grant such a broad conveyance. In such cases, the statutory language provides insight on what language should be avoided if a broad grant is not acceptable.
Subsection (f)(2) resolves a conflict in case law among the various areas of commerce affected by this Act. It clarifies that an exclusive license that does not otherwise deal with the issue, conveys exclusive rights including rights of the licensor. Thus, the licensor may not license or use the information within the scope of the exclusive license, and affirms that it has not granted any other subsisting license covering the same scope and will not grant any future license covering the same scope that takes effect during the duration of the original exclusive license. For example, a grant of exclusive right to distribute software in a stated geographical area means that the licensor itself will not engage in distribution within that same area during the term of the license, and that it has not previously conveyed the same rights that continue to exist during the term of the exclusive license.
SECTION 308. DURATION OF CONTRACT. If an agreement does not specify its duration, to the extent allowed by other law, the following rules apply:
(1) Except as otherwise provided in paragraph (2) and Section 208, the agreement is enforceable for a time reasonable in light of the commercial circumstances but may be terminated as to future performances at will by either party during that time on giving seasonable notice to the other party.
(2) The duration of contractual rights to use licensed subject matter is a time reasonable in light of the licensed informational rights and the commercial circumstances. However, subject to cancellation for breach of contract, the duration of the license is perpetual as to the contractual rights and contractual use restrictions if:
(A) the license is of a computer program that does not license source code but that transfers ownership of a copy or delivery of a copy for a contract fee, the total amount of which is fixed at or before the time of delivery of the copy; or
(B) the license expressly granted the right to incorporate or use the licensed information or informational rights with information or informational rights from other sources in a combined work for public distribution or public performance.
Uniform Law Source: Uniform Commercial Code: Section 2-309(2).
Definitional References: Section 102: "Agreement"; "Cancellation"; "Contract"; "Contractual use restriction"; "Copy"; "Delivery"; "Information"; "Informational rights"; "License"; "Licensee"; "Notice"; "Party"; "Termination".
1. Scope of the Section. This section deals with the agreements that are indefinite in their duration. It follows common law and original Article 2 of the Uniform Commercial Code making such agreements subject to termination at will in most cases, but creating two exceptions that establish important licensee protection by presuming (as a default rule) a perpetual license. Giving notice is required for at will termination. This section does not deal with cancellation for breach. It does not deal with contracts that specify their duration, such as a license for a stated number of years or for a perpetual term.
2. Reasonable Time. Subsection (1) adopts a rule of commercial reasonableness to resolve issues that arise in cases of contracts of indefinite duration. What time is reasonable for any given arrangement is defined by the circumstances. If the agreement is carried out over an extended period of time, the reasonable time can continue indefinitely while the parties continue to perform; the contract will not terminate until notice is given. The basic policy, however, is that a person making an open-ended commitment can be held to performance over a time that is reasonable, but cannot be placed in a position of perpetual servitude. The commercial circumstances that determine what is a reasonable time include consideration of licenses or third-party rights which constrict the licensor of the information. The licensor should not be presumed to have given a license that exceeds its own rights with respect to the information. As in common law and original Article 2, the contract is generally subject to termination at will.
In some cases, what constitutes a reasonable term can be determined by reference to other law. In this field, there are various federal policy considerations that affect the duration of licenses either by direct rule or indirectly by suggesting what is a reasonable time. Thus, a patent license that does not state its term can reasonably be presumed to extend for the life of the patent. A similar premise exists for an indefinite copyright license. For a copyright license of an indefinite term, however, duration is subject to over-riding federal copyright law rules. Rano v. Sipa Press, Inc., 987 F2d 580 (9th Cir. 1993). An obligation to pay royalties for use of information for an indefinite period extends for a reasonable time which can often be measured by the term over which proprietary rights continue to exist in reference to the licensed information.
Parties to a contract under either subsection (1) or (2) are not required, in giving notice of termination, to fix at peril of breach, a time which is in fact reasonable in the unforeseeable judgment of a later trier of fact. Under both setting, unless the term is interpreted as perpetual, the right to terminate at will enables closure of the relationship on appropriate notice, whether or not this occurs after a reasonable time has passed for the entire contract is not pertinent. If, on the other hand, a party communication a proposed time limit for the contract, that proposal calls for a response so that failure to reply will infer acquiescence to the proposed duration. If objection is made, however, or if the demand is merely for information, demand for assurance on the ground of insecurity may be made under this Act pending further negotiation.
The section applies only if there is a contract, but the contract does not state its duration. In some cases, failure to agree on duration indicates that no contract exists.
3. Termination at Will. The general rule is that the indefinite term contract can be terminated at will by either party, except as described in subsection (2) as to license rights and restrictions. This follows common law principles with respect to contracts generally. Under this standard, for example, a contract that grants a license and promises support services for an indefinite period can be terminated at will as to the support services. Treatment of the licensed rights is handled differently under subsection (2). At will termination enables a non-judicial method of ending the contract. Termination does not end all obligations or rights, including rights that vested based on prior performance. Which rights these include, of course, depends on the terms of the agreement.
4. Termination. Termination discharges executory obligations, except for contractual use restrictions. It does not end or otherwise affect rights that are vested based on prior performance. For example, if a single license fee paid grants a permanent right to use software, but the license also calls for an on-going obligation to deliver updates of the software for an indefinite term, termination does not affect the license rights, but does end the obligation to provide updates if that obligation was not earned by prior performance.
5. Contracts for Definite Term. The standards of this section do not apply if the agreement provides for a specific duration. Agreement to a definite duration may be found in express language, usage of trade or course of dealing or in a term otherwise implied from the circumstances. In deciding when this is true, most cases will be obvious. In uncertain cases, a distinction should be made between the term of a license and the term of a personal service obligation. A license for "the life of the edition", "for so long as the work remains in print" or perpetually defines a duration just as does a contract that specifies a one year duration. On the other hand, commitments to "lifetime" service is indefinite in duration unless the circumstances indicate a more definite measure of duration. In the case of a license term, what is being defined is the term over which use of the computer information extends and there is no risk of servitude that justifies ignoring the literal terms of the grant. On the other hand, in the case of commitment for services or new editions does raise the underlying problem to which the "reasonable term" rule applies
6. Presumed Perpetual Licenses. Subsection (2) rejects in two specific instances the Article 2 and common law rule that a contract that does not specify its duration is for a duration that is a reasonable time subject to termination at will. As in all other contracts, the presumed term is a reasonable time, but in two cases the default rule is that an indefinite term license, other than for source code, is perpetual as to the licensed rights and use restrictions, subject to cancellation for breach or contrary agreement. The exception for source code acknowledges commercial practice that denies long term rights in confidential material in the absence of express agreement. As elsewhere, terms of agreement may be found in express terms, usage of trade, course of dealing or the circumstances of the transaction. In many cases, these may indicate agreement for other than a perpetual term. The perpetual term rule does not apply to services, such as support obligations. These are within the general rule in subsection (1). There is no default rule about perpetual term if a party has an on-going obligation to deliver affirmative performances to the other party.
A perpetual term is the default rule if a license transfers ownership of a copy or delivers a copy of software for a single fee, the total amount of which is determined at or before delivery. This does not contemplate royalty or other variable fees whose total dollar amount cannot be determined at the outset. This rule seeks to identify situations in the mass market and other similar settings where the transaction commercially conveys implicit long term rights to the licensee. The default rule is over-ridden in cases where the circumstances suggest that, despite a single fee or similar terms, there is no agreement for perpetual rights.
The second situation deals with cases where the licensed information is incorporated into a product for distribution to third parties, such as an art clip licensed for use in a digital multimedia encyclopedia. This recognizes the reliance interests that develop in such case and which would be disrupted by an at will termination right.
SECTION 309. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING.
(a) A term that measures the quantity or amount of use by the output of the licensor or the requirements of the licensee means such actual output or requirements as may occur in good faith. If there are actual outputs or requirements in good faith, a party may not tender or demand a quantity or amount of use unreasonably disproportionate to a stated estimate or, in the absence of a stated estimate, to any normal or otherwise comparable previous output or requirements.
(b) An agreement by a licensor to be the exclusive supplier of copies to a licensee imposes on the licensor an obligation to use good-faith efforts to supply the copies.
(c) An agreement by a licensee to be the exclusive distributor of information imposes on the licensee an obligation to use good-faith efforts to promote the information commercially if the value received by the licensor substantially depends on that performance.
Uniform Statutory Source: Uniform Commercial Code: Section 2-306.
Definitional References: Section 102: "Agreement"; "Copy"; "Good faith"; "Information"; "Licensee"; "Licensor"; "Party".
1. Scope of the Section. This section deals with requirements and exclusive dealing contracts. Subsections (b) and (c) modify the original Article 2 rule for exclusive dealing arrangements to a requirement of a good faith effort to supply or promote the information. This brings together the diverse common law rules applicable to industries that have not been within the U.C.C. It avoids the uncertainty that comes from use of "best efforts" as a default rule, when courts have been unable to formulate a uniform meaning of that term..
2. Out-put and Requirements. A contract for one party to accept the entire output of the other or to meet or allow use that meets the requirements of the other, is not too indefinite to be enforced because it is held to mean the actual good faith output or requirements of the particular party. This principle has become a part of basic common law. The agreements also do not lack mutuality of obligation since the party who will determine the obligation is required to operate in good faith so that its output or requirements will approximate a reasonably foreseeable figure. The section envisions and permits reasonable elasticity and good faith variations from prior requirements or output even though they may result in discontinuation. Results such as that in Advent Sys., Ltd. v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991) are appropriate. A sudden expansion of demand based on an expansion of a facility or an unpredicted merger or acquisition would not be within the contract, but normal expansion undertaken in good faith would be within this section.
If an estimate of output or requirements is included in the agreement, no quantity or level of use or demand unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement limits the intended elasticity. In the same manner, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur. If an enterprise is sold and the buyer obtains or is bound by the requirements contract, the output or requirements in the hands of the new owner continue to be measured by the actual good faith output or requirements under the normal operation of the enterprise prior to sale. The sale itself is not grounds for sudden expansion or decrease.
3. Exclusive Dealing. Subsections (b) and (c) integrate bodies of law pertaining to exclusive dealing relationships in information with respect to exclusive dealing arrangements under a requirement of a good faith effort to promote or supply the information. This standard brings together diverse common law rules. Some cases refer to "best efforts" obligations, while other refer to good faith efforts, but the outcome of the decision seldom hinges on the phraseology and the meaning of "best effort" in this and other contexts is not clear. Despite differing language, the basic thrust of the case law is consistent across all of the fields. The exclusive licensee in a distribution contract has an obligation to undertake commercially reasonable efforts to market the product, consistent with ordinary business standards and business judgment, including judgments that reflects it own business needs and judgment about the marketplace.
The good faith effort standard in this section requires honesty in fact and adherence to commercial standards of fair dealing. Under this Act, the good faith concept is expanded from the original language of the Uniform Commercial Code and common law concept requiring mere "honesty in fact." The definition here also encompasses an obligation to act consistently with commercial standards of fair dealing. This additional concept creates a basis that allows courts to draw an appropriate balance in light of the commercial context and the existing traditions of that context if the contract is silent on the issue. What constitutes an effort that meets standards of commercial fair dealing, of course, must reflect the entire business context, including other obligations of each party and the extent to which efforts are necessary to give the other party a fair return on the contract..
Of course, the agreement of the parties may establish a higher standard. An agreement that does so may be found in the express terms of a record, or in usage of trade, course of dealing, or by implication from the circumstances of the transaction.
This section follows general law and creates this obligation only if the return to the licensee hinges primarily on the performance of the other party and the results of that performance in terms of royalties and other return. See, e.g., Beraha v. Baxter Health Care Corp., 956 F.2d 1436 (7th Cir. 1992); Permanence Corp. v. Kenmetal, Inc., 980 F.2d 98 (6th Cir. 1990). If the licensee receives substantial compensation independent of the results of the other's efforts, no special obligation arises, although of course, general concepts of good faith in performance apply.
SECTION 310. DELIVERY TERMS. Delivery terms such as "F.O.B." and "C.I.F." must be interpreted according to [Article 2 of the Uniform Commercial Code] and any applicable custom or usage of trade.
Definitional References: Section 1-201: "Term".
This section adopts the treatment of shipment terms found in original Article 2. These rules are default rules subject to contrary agreement. The agreement may be in express terms of a contract, or found in usage of trade, course or dealing or inferred from the circumstances of the contracting. An important factor in determining the actual agreement is the emergence of modern interpretations grounded in international understanding about the meaning of delivery terms.
SECTION 311. AGREEMENT FOR PERFORMANCE TO PARTY'S SATISFACTION.
(a) Except as otherwise provided in subsection (b), an agreement that provides that the performance of one party is to be to the satisfaction or approval of the other requires performance sufficient to satisfy a reasonable person in the position of the party that must be satisfied.
(b) Performance must be to the subjective satisfaction of the other party if:
(1) the agreement expressly so provides, such as by stating that approval is in the "sole discretion" of the party, or words of similar import; or
(2) the agreement is for informational content to be evaluated in reference to aesthetics, market appeal, subjective quality, suitability to taste, or similar characteristics.
Uniform Law Source: Restatement 228. Revised.
Definitional References: Section 102: "Agreement"; "Contract"; "Informational content"; "Party"; "Term".
This section deals with cases where the contract provides that the required performance is to be to the satisfaction of the other party, a common arrangement in information industries. Subsection (a) follows the "preference" stated in Restatement (Second) of Contracts § 228. It assumes that such "to the satisfaction" clauses require satisfaction measured under an objective, reasonable person standard. This precludes entirely arbitrary demands and is supplemented by the obligation of good faith that applies to all contracts.
There are cases where a subjective standard of satisfaction is appropriate. The Restatement and general contract law recognize this. Subsection (b) provides guidance for determining when such a subjective standard applies. The most obvious is when the contract specifically so states. Subsection (b)(1) provides language that indicates a subjective satisfaction standard. Also, the section presumes a subjective standard if the contract involves informational content evaluated based on aesthetics, market appeal or the like. A reasonable person standard in such cases lacks content since the nature of the required evaluation presumes personal judgment.
SECTION 401. WARRANTY AND OBLIGATIONS CONCERNING QUIET ENJOYMENT AND NONINFRINGEMENT.
(a) A licensor that is a merchant regularly dealing in information of the kind warrants that the information shall be delivered free of the rightful claim of any third person by way of infringement or misappropriation, but a licensee that furnishes detailed specifications to the licensor and the method required for meeting the specifications holds the licensor harmless against any such claim caused by compliance with the specification or method except for a claim that results from the failure of the licensor to adopt a noninfringing alternative of which the licensor had reason to know.
(b) A licensor warrants:
(1) for the duration of the contract, that no person holds a claim to or interest in the information which arose from an act or omission of the licensor, other than a claim by way of infringement or misappropriation, which will interfere with the licensee's enjoyment of its interest; and
(2) as to rights granted exclusively to the licensee, that within the scope of the license and as to other law that applies to the licensed rights:
(A) as to a patent license, to the knowledge of the licensor, the licensed patent rights are valid and exclusive to the extent that exclusivity and validity are recognized; and
(B) in all other cases, the licensed informational rights are valid and exclusive for the information as a whole to the extent that exclusivity and validity are recognized.
(c) The warranties in this section are subject to the following rules:
(1) If informational rights are subject to a right of public use, collective administration, or compulsory licensing, the warranty is subject to those rights.
(2) The obligations under subsections (a) and (b)(2) apply solely to informational rights arising under the laws of the United States or a State, or other jurisdiction of the United States, unless the contract expressly provides that the scope or the warranty obligations extend to rights under the laws of other countries. Language is sufficient for this purpose if it states "The licensor warrants [exclusivity] [noninfringement] in [specified countries] [worldwide]," or words of similar import. In that case, the warranty extends to the specified country or, in the case of a general reference to "worldwide" or the like, to all countries within the description, but only to the extent that the rights are recognized under a treaty or international convention to which the country and the United States are signatories.
(3) The warranties under subsections (a) and (b)(2) are not made in an agreement that merely permits use of rights under a patent.
(d) 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. In an automated transaction, language is sufficient if it is conspicuous. Otherwise, language in a record is sufficient if it states "There is no warranty against interference with your enjoyment of the information or against infringement", or words of similar import.
(e) Between merchants, a grant of a "quitclaim", or a grant in similar terms, grants the information or informational rights without an implied warranty as to infringement or misappropriation or as to the rights actually possessed or transferred by the licensor.
Uniform Law Source: Uniform Commercial Code: Sections 2A-211; 2-312. Revised.
Definitional References: Section 102: "Agreement"; "Automated transaction"; "Conspicuous"; "Contract"; "Information"; "Informational rights"; "License"; "Licensee"; "Licensor"; "Merchant"; "Person"; "Reason to know"; "Record"; "Scope"; "Term".
1. Scope of the Section. This section deals with implied warranties relating to non-infringement, exclusivity, and quiet enjoyment. These warranties, if they arise, cannot be disclaimed except as stated in this section.
2. Non-Infringement Warranty. Subsection (a) comes from original Article 2 of the Uniform Commercial Code. If the information is part of the licensor's normal stock and is provided in the normal course of its business, it is the licensor's duty to see that no claim of infringement of an intellectual property right by a third party will affect the information as delivered to the licensee. A transfer by a person other than a dealer in the particular type of information, however, raises no implication of such a warranty. This section creates a warranty, when applicable; but it does not create an implied right of indemnity unless the parties expressly so agree.
a. Delivered Free of Infringement. Subsection (a) requires that the information be delivered free of any claim of infringement. This warranty refers to circumstances at the time of delivery. It expresses a fundamental undertaking in a transfer of information: transfer of a copy does not infringe rights of another person. It does not pertain to future events, such as a subsequently issued patent.
The warranty does not cover infringement claims that result from a licensee's decision to use the information in connection with other information or property, the composite of which infringes a third party right. The decisions in Chemtron, Inc. v. Aqua Products, Inc., 830 F.Supp. 314 (E.D. Va. 1993) and Motorola v. Varo, Inc., 656 F.Supp. 716 (N.D. Tex. 1986) frame the issue correctly. That principle governs cases of computer software with multiple, generalized functions. For example, in a license of a spreadsheet program, the warranty is that the spreadsheet itself does not infringe another person's rights. If the licensee uses the capabilities of the software to implement an inventory control system that is covered by a patent held by a third party, the infringement comes from the licensee's use of the system and not from the software. No breach of an infringement warranty occurs and liability, if any, lies with the licensee. A licensor of software that can be adapted to may different functions at the option of the licensee does not warrant that none of the functions that might be implemented by the licensee infringe the rights of other parties.
b. Patent License. Under subsection (c)(3), the subsection (a) warranty does not apply to patent licenses. This means a party licensing a patent per se. While most patent licenses are not within this Act, a software license may include rights under a patent. For these cases, this Act adopts the rule that prevails in patent licensing generally. A patent license does not warrant that the licensee can use the licensed technology. Instead, as referenced in the basic concept of patent rights, the license merely states that the licensor will not sue for use of its rights. There is no warranty that the license assures that there are no blocking patents which may prevent use of the licensed patented technology. A patent does not create an affirmative right to use technology, but merely a right to prevent another person's use. Patent licenses are mere waivers of the right to sue and do not promise a right to non-infringing use of the technology unless the contract expressly so states. Thus, if a party licenses software and the software is supported in part by patent rights, the warranty is breached if use of the software infringes a third party patent. On the other hand, if the software licensor also grants a license for the patent itself, that license does not create a warranty under subsection (a).
c. Specifications and Hold Harmless Duty. There is no implication of a warranty by the licensor when the licensee orders information to be assembled prepared or manufactured on the licensee's specifications; in such cases, liability runs from the licensee to the licensor. In essence, if the project is defined by detailed specifications given by the licensee including the method for meeting those specifications or features, no warranty arises on behalf of the licensor and the licensee bears the obligation if, in such cases, the result of compliance infringes a third party right. See Bonneau Co. v. AG Industries, inc., 116 F.3d 155 (5th Cir. 1997). Under such circumstances, there is a tacit representation by the licensee that the licensor will be safe in following the specifications.
To establish this circumstance, the specifications must mandate acts that cause infringement, rather than allowing choices which may result in infringement. Thus, for example, a requirement that a product contain an image of a famous character specifies both the outcome (specification) and the method, triggering the hold harmless obligation unless that obligation does not arise because of other provisions of this section. The requirement design must be specific or detailed, rather than general. See Bonneau Co. v. AG Industries, inc., 116 F.3d 155 (5th Cir. 1997) (design of "sufficient specificity for a competent manufacturer to construct the product and, thus, constitutes a specification"). The "hold harmless" obligation only exists if infringement is caused by compliance, not because of choices of the licensor in implementing goals of the licensee. This section goes beyond Article 2 of the Uniform Commercial Code in protecting the licensee's from liability. A licensor receiving specifications with expertise in the field, cannot hold the licensee liable if the licensor failed to adopt a noninfringing alternative which it had reason to know existed.
d. Non-Infringement and Passive Transmission. The warranty in subsection (a) applies only to licensors of information. It does not apply to persons who merely provide communications or transmission services even if such service falls within this Act. Service providers of this type do not, for purpose of contract law, engage in activities that reasonably create the inference that they assure the absence of infringing information. That obligation could be expressly undertaken, but if not, it is not created by law. This Act takes no position on and has no effect on federal questions about what constitutes infringement in such situations. Whether, a particular 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. However, that issue pertains to liability in reference to the licensee. It has no bearing on whether a passive transmission provider is liable for infringement to the owner of intellectual property rights.
e. Limitations Period. The infringement warranty under this section does not extend to future performance. Section 805, establishes a limitations period for breach of the non-infringement warranty that commences on the earliest of when the breach was or should have been discovered, rather than on delivery of the information.
2. Quiet Enjoyment. The warranty of quiet enjoyment does not exist in Article 2 of the Uniform Commercial Code with respect to sales of goods. Paragraph (b)(1) creates that warranty for licenses for issues other than infringement. The licensor warrants that it will not interfere with the licensee's authorized exercise of rights under the contract. This "quiet enjoyment" warranty reflects the licensor's implied commitment not to act for the duration of the license in a manner that detracts from the grant to the licensee. It reflects that the nature of the limited interest transferred in a license - the right to use the information or informational rights - results in a need of the licensee for protection greater than that afforded to a buyer of goods. The warranty is limited to claims or interests that arise from acts or omissions of the licensor.
3. Exclusivity. Subsection (b)(2) deals with obligations that arise when the transaction is an exclusive license in the sense that it assures the licensee that it is the only person able to exercise the rights granted within the scope of the grant. "Exclusivity" pertains to two issues not relevant in non-exclusive licenses. The first involves the validity of the intellectual property rights. An exclusive licensor warrants that the rights conveyed are not in the public domain.
The second involves whether a portion of the rights may be vested in another person because co-authors or co-inventors were involved. Alternatively, the transferor may have executed a prior license for the same scope to a third party. In an exclusive license, the licensor warrants that this is not true. For non-exclusive licenses, the question of whether intellectual property rights are exclusive in the licensor is insignificant because it does not alter the end user's ability to continue to use the licensed rights without challenge.
A special rule governs patents, again reflecting practice in patent law. The exclusivity warranty is restricted to the licensor's knowledge at the time of contracting.
Exclusivity and validity are warranted only to the extent recognized in law. Thus, the licensor of a trade secret warrants that it has not granted rights to another person, but does not warrant that no other person independently holds or may discover the secret information. A trade secret gives no rights against independent discovery and, thus, the warranty does not purport to claim that no one else knows or uses the secret information.
Subsection (c)(1) further reinforces this theme. If, under applicable law, the rights are subject to compulsory licensing, public access or use, the warranty is limited by the terms of these rights. For example, a licensor of rights in information which, under applicable law, must be licensed to any and all parties for a specified fee, does not warrant exclusivity. These off-setting rules, however, must be embodied in law.
4. 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) recognizes this and provides that the exclusivity and infringement warranties extend only within this country and to a country specifically referenced in the license or warranty. Specification of particular countries or "worldwide" refers to specifications or representations made with express reference to the non-infringement warranty, such as "Licensor warrants non-infringement worldwide." Other references in a license may not be intended to create a warranty. For example, a grant of a license for worldwide use may be no more than a permission to use the information worldwide without risk of a lawsuit by the licensor, rather than a warranty that worldwide use will not infringe other rights. In the case of a "worldwide" warranty, the obligation extends only to countries that have intellectual property rights treaties with the United States. In the absence of such relationships, the rights created under United States law cannot create rights in the other country and, thus, the warranty cannot extend there.
5. Disclaimer. As with all other warranties, the warranties in the section can be disclaimed. This section provides for disclaimer in language based on original Article 2 of the Uniform Commercial Code. This requires specific language or circumstances indicating that the warranties are not given. Consistent with the general approach of contract law as a planning tool, illustrative language is provided. Subsection (d) limits the conditions under which the warranty can be disclaimed or modified, it does not limit or preclude avoidance or modification of the hold harmless obligation that might arise under subsection (a). If the circumstances or language clearly indicate no intent to hold harmless, that agreement is enforceable and this subsection does not require proof that the language is conspicuous.
SECTION 402. EXPRESS WARRANTY.
(a) Subject to subsection (c), an express warranty by a licensor is created as follows:
(1) An affirmation of fact or promise made by the licensor to its licensee in any manner, including in a medium for communication to the public such as advertising, which relates to the information and becomes part of the basis of the bargain creates an express warranty that the information to be furnished under the agreement must conform to the affirmation or promise.
(2) Any description of the information which is made part of the basis of the bargain creates an express warranty that the information must conform to the description.
(3) Any sample, model, or demonstration of a final product which is made part of the basis of the bargain creates an express warranty that the performance of the information must reasonably conform to the performance of the sample, model, or demonstration, taking into account such differences as would appear to a reasonable person in the position of the licensee between the sample, model, or demonstration and the information as it will be used.
(b) It is not necessary to the creation of an express warranty that the licensor use formal words such as "warrant" or "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, market appeal, or the like, of informational content; or
(3) a statement purporting to be merely the licensor's opinion or commendation of the information or informational rights.
(c) This [Act] does not alter or establish any standards under which an express warranty or an express contractual obligation for published informational content is created or not created. If an express warranty or contractual obligation is created for published informational content and is breached, the remedies of the aggrieved party are those under this [Act] and the agreement.
Uniform Law Source: Uniform Commercial Code: Sections 2A-210; 2-313.
Definitional References: Section 102: "Aggrieved party"; "Agreement"; "Information"; "Informational content"; "Licensee"; "Licensor"; "Party"; "Published informational content".
1. Scope and Basis of Section. This section follows original Article 2 of the Uniform Commercial Code on express warranties, 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 so clearly to the essence of that bargain that, as indicated in Section 406(a), words of disclaimer in a standard form cannot alter the dickered terms. "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 and they exist only unless disclaimed.
2. Basis of the Bargain. Subsection (a) adopts the "basis of the bargain" test originally set out in Article 2. This allows courts and parties to draw on an extensive body of case law distinguishing express warranties from puffing and other, unenforceable statements, representations or promises. The concept behind the "basis of the bargain" standard is that express affirmations, promises and the like are express warranties if they are within the matrix of elements that constitutes and defines the bargain of the parties, but that they are not express warranties if they are not part of the basis for the contract. This standard does not require that a licensee prove that it actually relied on a specific statement, affirmation or promise in deciding to enter into the contract, but does require proof that the statement, affirmation or promise played a role in defining the entire bargain. This standard enables the creation of express obligations on the more general showing that statements about the information are part of the deal and basic to it. On the other hand, express warranty law deals with bargains and not regulation. It does not impose liability in contract for all statements a licensor makes about an information product, even if not brought to the attention of the licensee.
The question is whether statements of the licensor made to the licensee have in the circumstances and in objective judgment become part of the basic bargain. No specific intent to make a warranty is necessary. 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 reliance on the specific statement need be shown in order to weave it into the fabric of the agreement. Rather, once made, to take such affirmations out of the agreement requires clear affirmative proof. The issue normally is one of fact. This is true also of the question of whether product documentation may create an express warranty. Whether the documentation is reviewed before or after the initial deal, the test is the same. If it contains affirmations of fact or promises that otherwise qualify and became part of the basis of the bargain, an express warranty may arise.
The question is whether language, samples, or demonstrations are fairly to be regarded as part of the contract. If language is used after the closing of the deal, (as when the licensee on taking delivery asks for and receives an additional assurance), the assurance may become a modification of the contract. If there is an agreement to modify the contract, that modification does not need to be supported by further consideration. Section 304. Alternatively, in appropriate cases, under the layered contracting recognized in original Article 2 and in this Act, the assurance may be treated as a further elaboration of the terms of the contract if the parties had reason to know this would occur. Section 210.
3. Relation to Disclaimers. The law of express warranty focuses on determining what it is that the licensor agreed to provide. A contract is normally a contract for something describable and described. Thus, descriptions of an information product, if made part of the bargain, are express warranties. If an express warranty is proven to exist, the obligations thus created ordinarily cannot be materially deleted. A general contract term disclaiming "all warranties, express or implied" is not given literal effect as to express warranties. Section 406(a). This does not to mean that the parties cannot make their own bargain, including a bargain that does not encompass a purported express warranty. But, to do so requires that the particular description or promise not become part of the bargain. In determining the actual agreement, consideration should be given to the fact that the probability is small that a real price is intended to be exchanged for a pseudo-obligation. For example, a license of a "word-processing program" that contains a general disclaimer of all warranties is nevertheless a contract for an information product that satisfies the basic description of a "word-processing program."
4. Puffing and Expressions of Opinion. Subsection (b) provides that puffing or mere statements of opinion do not form an express warranty. The law on the distinction between an actionable representation and puffing is extensive and well-developed. The distinction requires a determination based on the circumstances of the particular transaction. It reflects that in common experience some statements and predictions cannot fairly be viewed as entering into the bargain. In transactions involving computer information, the closer the statement relates to describing the technical specifications, technical performance or information description, the more likely it is to be an express warranty when communicated to the licensee, while the more the statement pertains to predictions about expected benefits that may result from use of the information, the more likely it will be found to be puffing. Of course, whether or not a statement is an express warranty does not affect whether the statement in context might yield a remedy under the law of fraud or misrepresentation.
Subsection (b) also refers to statements or demonstrations pertaining to aesthetics and market appeal of informational content. Aesthetics, as used here, refers to questions of the artistic character, tastefulness, beauty or pleasing character of the informational content, not to statements pertaining to how a person uses the informational content or its essential nature. For example, if it becomes part of the basis of the bargain, a statement that a clip art program contains useable images of "horses" or images of "working people" creates an assurance that the subject matter of the clip art program is horses or working people and that the images are usable. However, it does not purport to state that they are tasteful or artistically pleasing.
5. Advertising as a Source of Express Warranty. Paragraph (a)(1) provides that advertising may create an express warranty if the advertising statements otherwise conform to the standards for creation of an express warranty under this section. This expands the scope of express warranty law in some States. Statements made in advertising, of course, are puffing or mere expressions of opinion and do not create an express warranty. A warranty arises only if the advertising statement becomes part of the bargain and a bargain actually occurs. The affirmation of fact made in the advertising must be known by the licensee, influence and in fact become part of the basis of the bargain under which it acquired the computer information. If this does not occur, there is no express warranty. In appropriate cases, there may be liability for false advertising, but that does not arise under contract law, but under tort or advertising law. This section does not create a false advertising claim under the guise of contract law.
6. Descriptions. Paragraph (a)(2) makes specific some of the principles described above about when a description of the information becomes an express warranty. The description need not be by words. Technical specifications, blueprints and the like can afford more exact descriptions that mere language and, if made part of the basis of the bargain, become express warranties. Of course, all descriptions by merchants must be read against the applicable trade usage and in light of the concepts of general rules as to merchantability resolving any doubts about the meaning of the description. The description requires a commercially reasonable interpretation.
7. Samples and Models. The basic treatment of samples, models and demonstrations is no different that the treatment of statements. Although the underlying principles are unchanged, the facts are often ambiguous when something is shown to be illustrative in nature. In merchantile experience, the mere exhibition of a "sample", a "model" or a "demonstration" does not of itself show whether it is merely intended to "suggest" or to "be" the character of the subject-matter of the contract.
Representations created by demonstrations and models must be gauged by what inferences would be communicated to a reasonable person in light of the nature of the demonstration, model, or sample. Showing a sample of a keg of raw beans by lifting out a cup-full communicates one inference, while a demonstration of a complex database program running ten files creates an entirely different inference if the ultimate intended use of the system is to process ten million files. This difference also applies to beta models of software which are used on a test or a demonstration basis and may contain elements that are not carried forward into the ultimate product. In such cases, the parties ordinarily understand that what is being demonstrated on a small scale or what is being tested on a beta model basis is not necessarily representative of actual performance or of what will eventually be the product. As with any other purported express warranty, any affirmation model or demonstration must be interpreted in a reasonable fashion that reflects the circumstances of the test or demonstration. The court's discussion in NMP Corp. v. Parametric Technology Corp., 958 F. Supp. 1536 (S.D. Okla. 1997) is illustrative for software demonstrations.
8. Published Informational Content. Subsection (c) preserves current law for published informational content. This section does not create express warranty rules for published informational content, but does not preclude the imposition of any liability under other law or the creation of an express contractual obligation. No case law for published informational content uses Article 2 express warranty standards. See Joel R. Wolfson, Express Warranties and Published Informational Content under Article 2B: Does the Shoe Fit?, 16 John Marshal Journal of Computer & Info. Law 384 (1997). This subject matter entails significant First Amendment interests and general public policies that favor encouraging public dissemination of information. Courts that deal with liability pertaining to published informational content must balance contract themes with these more general social policies.
This section does not alter existing law regarding how obligations are established for published informational content. The cases deal with such obligations as questions of express contractual obligation, rather than warranty. For example, a promise to provide an electronic encyclopedia obligates the party to deliver that type of work, but that is simply a matter of defining the basic contractual promise. When the issues focus on the quality of the informational content under contract law, most courts conclude that the level of risk vis a vis published informational content and the potentially stifling effect that contract liability might have on the dissemination of speech encourage limiting or excluding liability. See Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (N.Y. City Ct. 1987). In some other cases, liability may arise under tort theories, such as in Hansberry v. Hearst, 81 Cal. Rptr. 519 (Cal. App. 1968). However, this section rejects the seemingly simple, but ultimately inappropriate step of merely adopting concepts from sales of goods to this much different context. That would risk a large and largely unknown change of law and over-reaching of liability in a sensitive area. It would create uncertainty that would in itself chill public dissemination of informational content while courts grapple with adapting entire new standards of liability to this area.
Where a contract obligation is breached with respect to published informational content, remedies under this Act apply and replace remedies under the common law. This includes all provisions of Part 8 of this Act, including standards that measure and exclude or limit damages.
9. Third Parties. This section deals with express warranties made by the licensor to its licensee. It does not deal with the enforceability under contract or tort theory of representations made by remote parties and relied on by an ultimate user of information. Cases in tort dealing with such issues pertaining to information does not generally parallel cases dealing with the manufacture and sale of goods. Information providers have been held liable to third parties in only a few, atypical cases. This Act does not establish, expand or exclude such third party liability.
SECTION 403. IMPLIED WARRANTY: MERCHANTABILITY OF COMPUTER PROGRAM.
(a) Unless the warranty is disclaimed or modified, a merchant licensor of a computer program warrants:
(1) to the end user that the computer program is reasonably fit for the ordinary purpose for which it is distributed;
(2) to the distributor that:
(A) the program is adequately packaged and labeled as the agreement or the circumstances may require; and
(B) in the case of multiple copies, the copies are within the variations permitted by the agreement, of even kind, quality, and quantity, within each unit and among all units involved; and
(3) that the program conforms to the promises or affirmations of fact made on the container or label, if any.
(b) Unless disclaimed or modified, other implied warranties may arise from course of dealing or usage of trade.
(c) A warranty created under this section does not apply to informational content, including its aesthetics, market appeal, accuracy, or subjective quality, whether or not included in or created by a computer program.
Uniform Law Source: Uniform Commercial Code: Sections 2-314; 2A-212.
Definitional References: Section 102: "Agreement"; "Computer program"; "Contract"; "Delivery"; "Informational content"; "Licensor"; "Merchant".
1. Scope of Section. This section adapts the implied warranty of merchantability from original Article 2 of the Uniform Commercial Code to computer programs. It applies to all computer programs provided by a merchant and thus extends the merchantability warranty to cases that under prior law have no implied warranties. The warranty does not depend on how the program is delivered, whether electronically or in a tangible copy. Disclaimer or modification of warranty is dealt with in Section 406. Obligations regarding informational content are described in Section 404.
2. Background and Policy. The implied warranty of merchantability reflects judgments about the ordinary nature of the undertaking in cases where a supplier is a merchant dealing in products of the particular kind. It also comes from one of three different legal traditions associated with computer information transactions. One, the source of this warranty, is from the Article 2 world and focuses on the quality of the result (product) delivered; establishing an implied assurance that this quality will conform to ordinary standards for products of that type. The second, from common law dealing with licenses, services and information contracts, focuses on the process or performance effort, rather than the result. The third, from common law pertaining to services in some states and to information contracts, rejects any implied obligation of accuracy or quality in a contract other than one involving a special relationship of reliance. In this and the following section, distinctions are drawn between computer programs, on the one hand, and information or services, on the other hand.
The implied merchantability warranty and the warranty in Section 404 pertaining to the accuracy of data may both apply to the same transaction and the same information product. The one applies to the program and its functions, while the other applies to the accuracy of data in an appropriate relationship.
3. Merchantability. This section states a modified version of the merchantability warranty, tailored to the nature of computer programs. The content of the obligation turns on the ordinary meaning of a product or program description as recognized in the applicable business, trade or industry. As in the Uniform Commercial Code, the implied warranty is made only by all merchant-licensors. Non-merchants, however, like merchants, are obviously subject in appropriate cases to claims grounded in theories premised on misrepresentation.
a. Fit for Ordinary Purposes. With reference to end users, the program must be fit for the ordinary purpose for which it is distributed. Ordinary purpose focuses on expected user applications of the type to which the product as distributed was addressed. To an extent greater than in sales of goods, computer programs are often adapted and employed in ways well beyond the uses expected when the distribution occurs. Use of ordinary, mass-market programs in the context of highly sensitive or commercial applications does not change the warranty into one that assures fitness for ordinary purposes of that use. Instead, the focus is on the type of uses to which the program is directed.
To be fit for ordinary purposes does not require that the program be the best or optimal one for that use. In addition, merchantability does not require perfection, but that the subject matter of the warranty fall generally within the average standards applicable in commerce for information of the type. The presence of some defects may be consistent with the merchantability standard.
In the late 1990's, a popular operating system program for small computers used by both consumers and commercial licensees contained over ten million lines of code or instructions. In the computer these instructions interact with each other and with code and operations of other programs. This contrasts with a commercial jet airliner popular that contained approximately six million parts, many of which involved no interactive function. Typical consumer goods contain fewer than one hundred parts. A typical book has fewer than one hundred fifty thousand words. In software, it is virtually impossible to produce software of complexity that contains no errors in instructions that intermittently cause the program to malfunction, so-called "bugs." The presence of errors in general commercial products is fully within common commercial expectation. Indeed, in programs of complexity, the absence of errors would be unexpected. In this environment, the contract law issue is whether the level of error exceeds the bounds of ordinary merchantability. This occurs only if the significance of the errors or their number lies outside ordinary commercial expectations for the particular type of program.
b. Distribution. If the transfer is to a person acquiring the program for re-distribution by sale, the program must be honestly resellable. Subsection (a)(2) sets outs two criteria under which this can be gauged - adequate packaging and even quality among multiple units. Consistent with the general merchantability concept of course, these standards are to be judged in light of the ordinary commercial context and expectations.
c. Labels. Subsection (a)(3) corresponds to the merchantability concept in original Article 2, confirming that merchantability includes conformance to descriptions of fact contained on labels or containers. This is consistent with the basic function of this warranty, which it to give implied assurance that the product is generally within the parameters of what is promised. The statements must be statements of fact, not mere puffing. In this aspect, the implied warranty arises from fact that will often also constitute an express warranty of description. Again, the meaning of any descriptive statement must be interpreted in light of the commercial context.
4. Disclaimer. As is true throughout United States law, the implied warranty here may be disclaimed. That principle is recognized in Section 406, which contains limitations on under what conditions disclaimers are effective. The right to disclaim implied warranties is central to the right of a party to define what it agrees to dell or license. As noted in Section 406(a), however, disclaimers are ordinarily not effective with respect to express warranties of description, even though they may limit the implied warranty described here.
5. Informational Content, Aesthetics. Subsection (c) makes clear merchantability does not apply to informational content, including the aesthetics of a product. This rule follows case law on this point under Article 2 of the Uniform Commercial Code.
Aesthetics, as used here, refer to questions of the artistic character, tastefulness, beauty or pleasing nature of informational content. These are matters of personal taste. On the other hand, merchantability standards are appropriate for whether the computer program is what it purports it to be and to whether it is useable. For example, if a complaint about the images created by a program is that they are not attractive, merchantability does not apply. If the complaint is that the commands do not function and that the images are blurred to being non-useable, an issue of merchantability exists. A statement that a clip art program contains images of "horses" gives assurance that the subject matter of the is horses and that the images are usable. It does not purport to state that they are tasteful or artistically pleasing or whether they are brown, beige, white or green.
6. Cause of Action for Breach. In a cause of action for breach of warranty, as with all products, it is of course necessary to show not only the existence of the warranty, but that the warranty was broken and that the breach of the warranty was the proximate cause of the loss sustained. In such an action, in complex computer systems involving different hardware and software, the loss must be connected to defects in the computer program for which a breach of warranty is claimed. Proof that losses were caused by events after the program was installed and unconnected to it operate as a defense.
SECTION 404. IMPLIED WARRANTY: INFORMATIONAL CONTENT.
(a) Unless the warranty is disclaimed or modified, a merchant that, in a special relationship of reliance with a licensee, collects, compiles, processes, provides, or transmits informational content, warrants to its licensee that there is no inaccuracy in the informational content caused by the merchant's failure to perform with reasonable care.
(b) A warranty does not arise under subsection (a) with respect to:
(1) published informational content; or
(2) a person that acts as a conduit or provides only editorial services in collecting, compiling, or distributing informational content identified as that of a third person.
(c) The warranty under this section is not within the limitations of Section 104(c).
Uniform Law Source: Restatement (Second) of Torts 552.
Definitional References: Section 102: "Informational content"; "Licensee"; "Merchant"; "Party"; "Published informational content".
1. Scope and Effect. This section creates a new implied warranty present in some informational content contracts, consulting, data processing or similar agreements. The warranty focuses on the accuracy of data, but does not create absolute liability or an absolute assurance of complete accuracy. Rather, it creates a protected assurance in such contracts that no inaccuracies are caused by a failure of reasonable care.
2. Accuracy. A party that provides or processes information in a special relationship of reliance warrants that no inaccuracy exists due to the provider's lack of reasonable care in performing its obligations under the contract.
a. Ordinary Standards as Described. Informational content is ac