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This Draft contains revisions based on the April Meeting and on-going discussion and communication with consumer and other groups. There are no fundamental changes not contained in prior drafts. However, this Draft presents two important themes that should focus discussion.

The first deals with several issues on which the Committee has not yet taken a position. These are discussed in Part A of these notes. They include ideas presented earlier to which no substantive objection has been made and a new submission regarding scope that should be considered.

The second theme involves maintaining a focus on the entire draft, as contrasted to the details of individual sections and the overall balance of various interests. As the political process unfolds, various positions have been suggested and publicized that, understandably, focus on narrow aspects of the Draft. It is important that a broader perspective also be retained. This is outlined in Part B of these notes.

While the Drafting Committee resolved a number of issues at the April Meeting, several broad themes remain to be considered. These include:

1. Treatment of Informational Content Submissions.

The January Draft proposed a solution to one problem involved in applying Article 2 concepts of tender, rejection and revocation to information industries. Unlike the general rules in common law and the Restatement, the Article 2 model contains a very explicit focus on a particular transactional framework. If applied to entertainment and publishing sectors at the upstream level, this model would introduce new and often undesirable standards in the manuscript, script and other aspects of the information content industries. The proposed solution, which has not been reviewed by the Committee, lies in the concept of "information submissions" that applies to cases involving contracts where the submission is reviewed in terms of aesthetics and market suitability.

The insight that supports separate treatment for these cases is that it is a mistake to assume that submission of a manuscript is equivalent to tender of delivery of a product. It is not. Rather than requiring or anticipating immediate acceptance or rejection, submissions of content initiate a process of review and revision leading to a later decision to accept or reject the submission. Section 2B-602 reflects that reality; it places these transactional situations entirely outside of the tender-acceptance rules, relying heavily on common law themes (as implemented in Article 2B) and trade practice to define the rights of the parties.

One consequence is that, in idea or information submission contexts, acceptance does not occur unless there is an express indication of acceptance (or rejection) by the licensee. This corresponds to commercial practice in this context.

2. Treatment of "Performed on Receipt" Transactions.

A second setting in which Article 2 concepts of tender, inspection etc. create an uneasy fit with practice in information industries arises with respect to transactions in which, by merely viewing information, the licensee receives all the value of the transaction and because of the nature of the performance, that value cannot be returned in the sense that a defective toaster can be returned. This might involve, for example, a Dun and Bradstreet report on a company, a license of a formula for Coca Cola, a credit report, or a screening at home of a pay per view motion picture. In these cases, the idea of a right to reject is not relevant. What is relevant is ensuring that the recipient can recover if the received performance was not consistent with the contract.

Forcing an Article 2 framework on these transactions creates a dysfunctional change from common law principles, especially in the Article 2 right to inspect before payment. Inspection in such cases in effect transfers the value and the licensee cannot return (a basic requirement of rejection) the value even if it desires to do so.

Section 2B-608 proposes an treatment of such transactions that exists outside the sale of goods framework on tender, inspection and rejection. It places the transaction under the general rules of 2B-601 which parallel common law; the law currently applicable to such transactions. The common law principle does not describe a right of rejection, but allows one to avoid paying anything for performance that constitutes a material breach or to recover back the full payment previously made and allows recovery of damages for lesser breaches.

3. Mass Market License.

During the December meeting, the Drafting Committee and observers extensively discussed the definition and application of the concept of "mass market" with respect to this Article. Being a new, relatively innovative concept, much of the discussion focused on identifying the basic theme and structure of how the definition should be approached.

As a result of this discussion, the Committee voted to adopt an approach to defining the idea of a mass market in a structure centering on standard forms used in relatively small transactions directed to the general public. In light of the risk allocation issues involved and new nature of the undertaking, the agreed goal was to focus the definition on relatively small transactions in a retail marketplace. This Draft contains a definition implementing that decision. For non-consumer transactions (e.g., transactions between two businesses in a retail market), the definition combines a reference to retail and general public audiences with a monetary cap to achieve the intended focus.

The critical issue in the idea of a mass market license deals with how the concept is applied. As discussed in prior memoranda, the two general approaches to using this concept are: 1) treating the marketplace definition as a surrogate for consumer protection and thereby extending consumer protections to business transactions, or 2) using the concept primarily as a marketplace identifier which keys into various expectations about the nature of transactions in that market. In theory, the differentiation between consumer and mass market constructs as to when they should apply turns on whether the goal is to protect individuals who lack the expertise to understand contract issues (e.g., consumer) and cases where the goal is to identify a marketplace by reflecting presumed assumptions applicable in that marketplace. During the February Meeting, the Committee opted to apply the concept of "mass market" as the operative theme in all but a few sections in which the issue arises. The following applications of the two concepts exist in the current Draft:

"CONSUMER" APPLICATIONS:

2B-106 (choice of law): default rule

2B-107 (choice of forum): contract choice

2B-303 (limiting effect of no-oral modification clause): contract method

2B-618 (hell and high water clauses): effectiveness of clause

"Mass Market" Applications:

2B-105 (opt in to Article 2B): barred in mass market, rather than just consumer

2B-304 (modification of continuing contracts): withdrawal right required in mass market

2B-308 (notice of terms): terms unenforceable in mass market, rather than just consumer

2B-313 (viruses) effect of disclaimer limited in mass market, rather than just consumer

2B-403 (implied warranty of quality): merchantability in mass market

2B-406 (disclaimer of warranty): conspicuous required in mass market

2B-502 (transferability of license): mass market presumed transferable

2B-504 (security interest without consent): allowed in mass market

2B-601 (perfect tender): required in mass market, rather than just consumer

2B-607 (perfect tender): required in mass market, rather than just consumer

2B-610 (refusal for imperfect tender): allowed in mass market rather than just consumer

Perhaps the most important of these applications from the standpoint of causing increased risk to businesses who provide information pursuant to Article 2B are the provisions of Section 2B-308(b). The refusal term concept adopted in that section creates a potentially significant degree of uncertainty about what terms are and are not enforceable in a standard license and the degree of risk is directly associated with the scope of application of that section (e.g., consumer transactions or any business transaction occurring in what the draft defines as a mass market). At the April Meeting, the Committee narrowly voted to not adopt a reconstruction of that section which was suggested by a consumer advocate and would have narrowed the risk element significantly, while still protecting consumer interests.

4. Consumer Issues.

At several points, questions have been raised about the relationship between consumer law and Article 2B. As a general rule, the approach taken in Article 2B has been to not detract from existing law under Article 2 unless a significant difference exists between Article 2B subject matter and the transactions in goods that have served as the basis for traditional consumer rules. In some cases, this results in transporting Article 2 protections into a previously common law realm to which consumer protection law has not previously extended.

In some situations, such as with respect to the treatment of viruses and the ability to exclude from consumer contracts some terms of a standard form that, while conscionable, have other characteristics that suggest exclusion, Article 2B has enhanced consumer rights as compared to rights under current law in UCC Article 2.

As a general rule, Article 2B leaves unaffected state laws that give consumer protections in reference to the subject matter covered. The sole exception to that occurs in reference to the electronic contracting rules and is outlined in 2B-104(b).

Implicit in this is a judgment that Article 2B is not intended as a consumer protection code, but a commercial code.

A chart is attached reflecting a comparison between existing Article 2 law and Article 2B provisions.

5. Scope: The Role of Banks.

A Commissioner, representing Citibank, has communicated a proposal that the scope of Article 2B be adjusted to exclude, in essence, any transaction involving a bank as the licensor. The argument for this position is stated in the letter from Citibank that was distributed at the last meeting of the Committee. There are at least three issues presented by this proposal.

The first deals with whether Article 2B should cover information transactions where the subject matter (e.g., the information) represents funds or funds transfers regulated by other articles of the U.C.C. and by federal and state banking regulation. This Draft has consistently excluded materials covered by these other articles and contains a clarified exclusion about information representing money or monetary equivalents. Importantly, in implementing this exclusion, the Committee should recognize that modern developments in digital cash and similar systems place many institutions other than banks in this commercial environment. Regulations, such as Regulation E regarding funds transfer, do not apply solely to banks, but to any holder of a depository account and, depending of on-going regulatory activity, non-banks entities ill be included (e.g., a digital account created on a "smart card" for use to purchase a total of $100 of coffee from a coffee shop, a card containing frequent flier mileage for airline use).

The second issue deals with ho-Z this article deals with compliance with compliance to state or federal regulations about disclosure. The Citibank proposal suggests that a reason for exclusion lies in the inability to conform to both federal regulated disclosures and Article 2B disclosure requirements. This issue has been raised many times in discussion, but has not been resolved by the Committee. One response lies in the definition of "conspicuous" terms, the idea of manifesting assent and the idea of refusal terms. As redrafted, 2B-308 provides that a term disclosed in compliance with state or federal disclosure regulations is not a refusal term. A similar approach could be taken in reference to the other mentioned issues.

The third issue is fundamental to this Article. It involves drawing a line between regulated and excluded (if the Committee so chooses) banking activities, and information or access licensing identical to that engaged in by Netscape, Westlaw, Home Shopping, Microsoft Network, America On-Line, and others. As the information industries experience convergence where motions pictures and software tend to be increasingly the same, so too is the banking industry converging into fields identical to that of the information industries. Banking entry into these fields is regulated - a bank must obtain approval under Regulation Y to do so. But this is scope regulation, not content regulation. A review of bank websites, for example, reveals that some deal only with on-line banking, while others do not. The Wells Fargo site, for example, offers a general shopping mall, a link to purchase software and various other information services.

+ reduces uncertainty and non-uniformity of software and online contract law

+ provides contract law roadmap for converging industries with differing traditions

+ confirms and reinforces contract freedom in commercial transactions

+ innovates concept of mass market transaction that extends U.C.C. consumer protections to some businesses

+ establishes strong protection encouraging dissemination of published informational content in contractual relationships

+ expressly recognizes layered contract formation occurring over time

+ clarifies enforceability of standard forms in commercial deals subject to procedural requirements

+ proposes solution for battle of forms context

+ applies "material breach" concept corresponding to common law

+ sets standards relating to access and internet contracts

+ establishes contract framework for idea and content submission

+ adjusts statute of frauds to information transactions

+ provides ownership rules for outsourcing and development contracts

+ creates understandable implied warranty for commercial deals

+ outlines relationship between retailer, publisher and customer

+ refines standards for enforcement of liquidated damages rule

+ allows parties to contract for specific performance

+ provides standard interpretations for often litigated grant terms

+ workable choice of law rules for internet

+ fully enforceable choice of forum clause in commercial contracts

+ establishes guidance for enforceable attribution procedure in electronic contracts

+ validates mass market license subject to refusal term concept

+ creates method for contracting in Internet and similar contexts

+ establishes guidance on the meaning of grants

+ recognizes licensor control of transferability of the license

+ deals with effect on warranty of modification of code in a copy of a program

+ limits infringement warranty to knowledge but expands it to cover use

+ codifies contractual treatment of electronic limiting or management devices

+ reconciles inspection concepts with presence of vulnerable confidential material

+ establishes guidance on procedures to modify on-going contracts

+ defines exceeding a license as a breach of contract

+ establishes standard on connection of remedy and consequential damages limits

+ excludes consequential damages for published informational content

+ broadens financing options for licensee interest in a non-exclusive license

+ creates refund right and procedural steps that give a real option to withdraw as a precondition for creating a contract in mass market

+ gives courts the right to invalidate undisclosed refusal terms in standard form mass market transactions for both consumers and businesses

+ gives licensee a right of quiet enjoyment in the license

+ codifies that advertising can create an express warranty

+ creates a warranty for accuracy of non-published information content

+ creates implied system integration warranty

+ extends infringement warranty to a warranty that use does not infringe

+ requires that disclaimers of implied warranties be in a record (writing)

+ expressly recognizes implied licenses

+ creates broad scope presumptions

+ makes mass market licenses presumptively transferable

+ uses perfect tender rule for mass market transactions which does not exist in current law except for goods

+ requires affirmative acts of assent to a record

+ creates direct contract with remote publisher in mass market

+ increases class of people to whom warranty runs for all types of damage

+ creates right to demand a cure for accepted imperfect tender in commercial contracts

+ enforceability of releases without consideration

+ enforceability of term providing license cannot be canceled

+ creates warranties and rights against retailer independent of publisher license

+ places substantial limitations on electronic self-help

+ presumes perpetual term in single payment software license

+ prohibits choice of forum that unfairly disadvantages consumer

Art 2: Rules Relating to ConsumersArt. 2B: Rules Relating to Consumers

GENERAL RULES

Consumer protections extend to businesses via mass market conceptdoes not provide for thisimplicit in "mass market" for most consumer-related rules

Non-UCC consumer rules; relationship to UCCno provisionexpressly retains and defers to consumer rules outside U.C.C., except for electronic contract formation issues

Mass Market Standard Forms: invalidate some terms even though the terms are not unconscionableno protection; Restatement adopted in less than 10 states; case law generally sustains enforcement of forms in the absence of special legislation and except in battle of forms which seldom affects consumersexcludes "refusal" terms where there was no knowledge and assent to the term; requires procedures and refund opportunity; applies modified Restatement rule (2B-308)Standard forms: require affirmative act to be boundnot dealt with; cases often allow enforcement without affirmative act; see Gatewaycontract not enforceable unless consumer agrees or affirmatively manifests assent to the form (2B-308)Refund right: if terms of form contract are not acceptableno rule; case law does not require a refund rightrequired if license refused; source of refund may be either the remote publisher or the retailer (2B-113) Effect of remote manufacturer (publisher) contract terms on obligations of retailernot dealt with; case law varies, but often makes the two independentspecifies that retailer is not bound by and does not receive the benefits of the remote party's contractual terms (2B-606)

Parol evidence

no special rule for consumerssame (2B-301) Modification: bar oral modifysignature makes clause enforceablemanifest assent makes clause enforceable (2B-303)Unconscionable clause invalidtraditional rule same (2B-109)Unconscionable: clause or contract can be invalidated for unconscionable inducementleft to other lawsame (2B-109)LAW AND FORUM CHOICE

Choice of forum: enforceability of contract term dealing with the issueno rule; common law includes Supreme Court decision enforcing against a consumercontract choice not enforced against consumer unless no "unfair disadvantage;" also subject to common law limits (2B-107)Choice of law: in the absence of a contract term dealing with the issueno rule; Art. 1 or common law rules applyon-line contracts: licensor location; for tangible items involving consumers: delivery place; otherwise Restatement (2d) rules (2B-106)Choice of law: enforceability of contract term dealing with the issue no rule; Art. 1 requires that the contract choice have a reasonable relationship to the transactionallows contract choice except where precluded by consumer statute or judicial rule which are not affected by Article 2B

WARRANTIESWarranty: title or authoritygood title warrantyauthority warranty (2B-401)

Warranty: infringementwarranty that merchant will deliver free of infringement, but warranty does not apply to the use of the information and the premise that use does not infringe; warranty creates liability without knowledgewarranty that merchant will deliver information free of infringement claims and that the use of the information by the licensee does not infringe; warranty is that there is no knowledge (2B-401)Warranty: quiet enjoyment

no warrantywarranty (2B-401)

Implied Warranty: merchantability of productgiven to buyer by merchant sellersame (2B-403)Implied Warranty: accuracy of informational contentno warranty warranty except for published informational content (2B-404)Implied Warranty: fitness

given to buyer for product only same (2B-405)Implied Warranty: System components will work in integrationno warrantywarranty (2B-405)Viruses: Contractual Obligationno warranty; could be implicit in the disclaimable merchantability warranty, but no current case law on pointobligation to use reasonable care to avoid required and this obligation cannot be disclaimed in mass market with respect to tangible products (2B-313)Express warrantyany affirmations or promises that become part of basis of bargain; except pufferysame (2B-402)Express warranties: created by advertisingno specific rule; case law variescodifies that advertising can create an express warranty (2B-402)DISCLAIMERS

Title & infringement: is the warranty disclaimable?yes; through specific language or circumstancessame (2B-401)Express warranties: is the warranty disclaimable?in most cases cannot be disclaimed; requires that disclaimer and warranty be read as consistent or, if that is not possible, that disclaimer not effectivesame (2B-406)Merchantability warranty: is the warranty disclaimable?yes same (2B-406) >merchantability - how disclaim?mention merchantability; no record required, but conspicuous if a record is usedplain language disclaimer along the lines provided in text or mention the word merchantability; requires that disclaimer be in a record and conspicuous (2B-406)Fitness warranty: is the warranty disclaimable?yes same (2B-406)

>fitness: how disclaim?say "no warranties beyond this"

plain language (2B-406)Disclaimer: "as is"

works for all warranties but the warranty of good title

same (2B-406)THIRD PARTY LIABILITY

Third party liability majority version: extend to householdyessame (2B-409)Third Party majority version: damages that are coveredpersonal injury only; may disclaim basic warrantypersonal injury and economic loss; may disclaim warranty (2B-409)ACCEPTANCE AND REJECTION

Acceptance of tendercan only occur after opportunity to inspectsame; except for services and informational content (2B-609)Acceptance: time to accept or rejectno specific time period specifiedsame (2B-612)Right to reject: single delivery"perfect tender"same (2B-610)Right to reject after defined time from delivery (e.g., 7 days)not givensame Right to reject: deliveries made in installmentsrequires substantial impairmentrequires material breach (2B-601)Revocation of Acceptance

requires substantial impairmentrequires material breach (2B-613)Seller/ Licensor right to cure in consumer casesallowed in some casesconsumer controls the issueDAMAGES AND REMEDIES

Damages presumed to include consequential damages unless contract indicates otherwise

same (2B-707, 709)Consequentials include personal injuryyes, if proximate causation existssame (2B-102)Damages: Contractual limitation on economic loss recoverycan limit damages if not unconscionablesame (2B-704)

Damages: Contractual limitation on personal injury loss recoverypresumed unconscionableno specific rule (2B-704)Modify Remedies

allowedsame (2B-704)Limiting damages to replace or repairallowedsame (2B-704)Effect of failure of limited remedy on contractual limitation of consequential damagesno clear rule; case law splitsthe two contract terms are independent unless contract provides otherwiseMinimum adequate remedy: does this over-ride contract termsnot as indicated in statute; comments imply that this is a consideration, but few states apply that theorynot as indicated in statuteStatute of limitationsfour years from date of breach in most cases; cannot be reduced below one yearfour years from date of breach, extended to maximum of five by discovery rule; cannot be reduced to less than one year

(2B-705) > Limitations: when warranty extends to future, from what date does limitation period run?cause of action for warranty breach accrues when breach was or should have been discoveredaccrues when the conduct occurs or should have occurred, but no later than the date the warranty expires (2B-705)Self Help Repossessionif seller retains title, Art. 9 applies and allows repossession for any defaultrequires material default and places other restrictions greater than in Art. 9 (2B-716)

SECTION 2B-709. LICENSEE'S DAMAGES.

SECTION 2B-710. RECOUPMENT.

SECTION 2B-716. LICENSOR'S RIGHT TO SELF-HELP.

SECTION 2B-101. SHORT TITLE. This article may be cited as Uniform Commercial Code - Licenses.

Uniform Law Source: UCC 2-102.

Reporter's Note:

The scope of Article 2B is outlined in section 2B-103. While the scope covers more than licenses, the transaction used to develop this article involves licensing of information. The title follows the approach in Article 2 which is designated "sales" because that was the primary transaction format used to develop provisions for that Article, but the actual scope extends to all "transactions" in goods.

SECTION 2B-102. DEFINITIONS.

(a) In this article:

(1) "Access contract" means a contract for electronic access to a resource containing information, resource for processing information, data system, or other similar facility of a licensor, licensee, or third party.

(2) "Authenticate" means to sign, or to execute or adopt a symbol, a digital identifier, or encrypt a record in whole or in part with present intent to identify the authenticating party, or to adopt or accept a record or term, or to establish the authenticity of or signify a party's acceptance of a record or term that contains the authentication or to which a record containing the authentication refers.

(3) "Cancellation" means an act by either party which ends a contract because of a breach by the other party.

(4) ""Computer program"" means a set of statements or instructions to be used directly or indirectly to operate in an information processing system in order to bring about a certain result, but does not include any informational content created or communicated as a result of the operation of the system.

(5) "Consequential damages" includes compensation for losses of a party resulting from its general or particular requirements and needs which at the time of contracting the other party had reason to know would probably result from a breach of contract and which are not unreasonably disproportionate to the risk assumed by the party in breach under the contract and could not have been prevented by the aggrieved party by reasonable measures. The term also includes losses resulting from injury to person or property proximately resulting from breach of warranty. The term does not include direct or incidental damages.

(6) "Conspicuous" means so displayed or presented that a reasonable individual against whom or whose principal it operates ought toshould have noticed it or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of the message by an individual. A term is conspicuous if it is:terms include:

(A) a heading in all capitals (e.g., Non-Negotiable Bill of Lading) equal or greater in size to the surrounding text;

(B) language in the body or text of a record or display in larger or other contrasting type or color than other language;

(C) a term prominently referenced in the body or text of an electronic record or display that can be readily accessed from the record or display;

(D) language so positioned in a record or display that a party cannot proceed without taking some additional action with respect to the term or the reference thereto; or

(E) language readily distinguishable in another manner.

(7) "Consumer" means an individual who is a licensee of information primarily for personal, family, or household use. The term does not include a person that is a licensee of information primarily for profit making, professional, or commercial purposes, including agricultural, business management, and investment management, other than management of an ordinary person's personal or family assets. Whether or not an individual is a consumer is determined by the intent of the licensee at the time of contracting.

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

(9) "Copy" means information that is fixed on a temporary or permanent basis in a medium from which the information can be perceived, reproduced, used, or communicated, either directly or with the aid of an information processing machine or similar device.

(9a) "Court" includes an arbitrator or other dispute resolution officer.

(10) "Delivery" means the transfer of physical possession, or the communication, of a copy to a recipient of the copy, to a facility controlled by the recipient or its intermediary, or to a bailee if the recipient has a right of access to the copy in the bailee's possession.

(11) "Direct [general] damages" means compensation for losses of a party consisting of the difference between the value of the expected performance as measured by the contract and the value of the performance actually received. The term does not include consequential damages and incidental damages.

(12) "Electronic" means electrical, digital, magnetic, optical, electromagnetic, or any other form of wave propagation, or by any other technology that entails capabilities similar to these technologies.

(13) "Electronic agent" means a computer program or other electronic or automated means used, selected, or programmed by a party to initiate or respond to electronic messages or performances in whole or in part without review by an individual.

(14) "Electronic message" means a record that, for purposes of communication to another person, is stored, generated, or transmitted by electronic, optical, or similar means. The term includes electronic data interchange, electronic or voice mail, facsimile, telex, telecopying, scanning, and similar communications.

(15) "Electronic transaction" means a transaction formed by electronic messages in which the messages of one or both parties will not be reviewed by an individual as an expectedroutine step in forming the contract.

(16) "Financier" means a person that pursuant to a security agreement or lease provides a financial accommodation to a licensor or licensee and obtains an interest in the rights under a license of the party to which the financial accommodation is provided. The term includes a person that becomes a licensee and then sublicenses or otherwise transfers the license to the financially accommodated party only if, before the licensor provides the information, the licensor receives notice of the intent that the financially accommodated party will be the end user of the information and the financially accommodated party agrees to the terms of the license as a condition to the financial accommodation.

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

(18) (A) "Incidental damages" includes compensation for any commercially reasonable charge, expense, and commission incurred after breach by the other party in:

(i) inspection, receipt, transportation, care, or custody of property;

(ii) stopping shipment, delivery, or transmission;

(iii) effecting cover or return of copies or information;

(iv) reasonable efforts to mitigate the consequences of breach; and

(v) actions otherwise incidental to the breach.

(B) The term does not include compensation for consequential or [direct] [general] damages.

(19) "Information" means data, text, images, sounds, computer programs, databases, literary works, audiovisual works, motion pictures, mask works, or the like, and any intellectual property or other rights in information.

(20) "Informational content" means information which data, text, images, sounds, or similar information is intended to be communicated to or perceived by a person in the ordinary use of the information.

(21) "[Intellectual] [Information] property rights" includes all rights in information created under laws governing patents, copyrights, trade secrets, trademarks, publicity rights, or any similar law that permits a party independent of contract to control or preclude another party's use or disclosure of information because of the rights owner's interest in the information.

(22) "License" means a contract that expressly authorizes, prohibits or controls grants permission to access to or use of information, if the contract expressly conditions, withholds, or limits the scope of the rights granted, grants only nonexclusive rights, or affirmatively grants less than all rights in the information, whether or not the contract transfers title to a copy of the information. The term includes an access contract and a consignment of copies of information. The term does not include an assignment or other a contract that transfers ownership of intellectual property rights, that reserves or creates a financier's interest, or that makes a transfer by will or operation of law.

(23) "Licensee" means a transferee or any other person designated in, or authorized to exercise rights as a licensee in a contract under this article whether or not the contract constitutes a license.

(24) "Licensor" means a transferor in a contract under this article whether or not the contract constitutes a license. The term includes a provider of services. In an access contract, as between a provider of services and a customer, the provider of services is the licensor, and as between the provider of services and a provider of content for the service, the content provider is the licensor. If performance consists in whole or in part of an exchange of transfers of information, each party making a transfer is a licensor with respect to the information it providestransfers.

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

(26) "Mass market transaction" means a transaction in a retail market for information involving information, directed to the general public as a whole under substantially the same terms for the same information, and involving an end user licensee that is an end user and acquired the information in a transaction under terms and in a quantity consistent with an ordinary transaction in the general retail distribution. The term does not include:

(A) a transaction between parties neither of which is a consumer in which either the total consideration for the particular item of information or the reasonably expected fees for the first year of an access contract exceeds [ ];

(B) a transaction in which the information is customized or otherwise specially prepared for the licensee;

(C) a license of the right to publicly perform or publicly display a copyrighted work; or

(D) a commercial site license or an access contract between two businessesparties neither or which is a consumer with respect to the particular transaction.

(27) "Merchant" means a person that deals in information of the type involved in the particular transaction, a person that by occupation purports to have knowledge or skill peculiar to the practices or information involved in the transaction, or a person to which knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that by its occupation purports to have the knowledge or skill.

(28) "Nonexclusive license" means a license in which the licensor or other person authorized to make a transfer or license is not prohibited from licensing the same rights in information within the same scope to other licensees or having and has not previously done so in a license the remains in force at the time of the contract. The term includes a consignment of copies.

(29) "Published informational content" means informational content that is prepared for, distributed, or made available to all recipients or any class of recipients in substantially the same form and not provided as customized advice tailored for the particular licensee by an individual acting on behalf of the licensor using judgment and expertise. The term does not include informational content provided within a special relationship of reliance between the provider and the recipient.

(30) "Receive" means to take delivery of a copy of information. An electronic record is received when it enters an information processing system in a form capable of being processed by a system of that type and the recipient uses or has designated that system for the purpose of receiving such records or information. "Receipt" has an analogous meaning.

(31) "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.

(32) "Release" means an agreement not to object to, or exercise legal or equitable remedies against, the use of information if the party granting the release is not required to act affirmatively enable or support the other party's use of the information by providing copies of the information, access, or otherwise. The term includes a waiver of intellectual property rights or a covenant not to sue.

(33) "Sale" means the passing of title to a copy of information for consideration.

(34) "Scope", with respect to a license, means the terms of the license that define the licensed subject matter or copies, the uses authorized, permitted, prohibited, or otherwise controlled, the geographic area, market, or location in which the license applies, and the duration of the license.

(35) "Software" means a computer program including any informational content included or to be included as part of a program and any supporting material such as data, program description, media, or documentation provided by a licensor as part of the transaction.

(36) "Software contract" means a contract that licenses software or that conveys ownership of software, including a contract to develop software as a work for hire, whether or not the contract transfers ownership of a copy of the software.

(37) "Standard form" means a record, or a group of linked records presented as a whole, prepared by one party for general and repeated use and consisting of multiple contractual terms used in a transaction without negotiation of or changes in most of the terms. Negotiation or customization of price, quantity, method of payment, standard performance options, or time or method of delivery does not preclude a record from being a standard form.

(38) "Substantial performance" means performance of an obligation in a manner that does not constitute a material breach of contract.

(39) "Terminate" means to end a contract or a part thereof by an act by a party under a power created by agreement or law, or by operation of the terms of the agreement for a reason other than for breach by the other party .

(40) "[Transfer] [Activation] of rights" means an initial grant of a contractual right or privilege as between the parties for the transferee to have access to, modify, disclose, distribute, purchase, lease, copy, use, process, display, perform, or otherwise take action with respect to information, coupled with any actions initially necessary to enable the transferee to begin to exercise the right or privilege.

(b) In addition, Article 1 contains general definitions and principles of construction that apply to this article.

Committee Votes:

1. Adopted the term "authentication" to replace "signed" by a consensus without a formal vote.

2. Voted to retain the concept of "mass market" licenses as in prior drafts, subject to revision of the definition of this term and consideration of its use in specific sections as contrasted to use of the term "consumer." Vote: 13-0 (September, 1996)

3. Voted to adopt a definition of "mass market license" that utilizes a reference to a market involving the general public and that centers on small retail transactions including most consumers and excluding special primarily business transactions. (December, 1996)

4. Voted to move references in definition of consequential damages to the comments except for the personal injury reference. Vote: 8-5 (Feb. 1997)

5. Rejected a motion to delete "intellectual property rights" from the definition of "information." Vote: 3-5 (Feb. 1997)

6. Voted 10-2 to retain the mass market concept pending consideration of its application in the Article. (Feb. 1997)

7. Voted to delete the language in mass market definition that provided explicit coverage of all consumer transactions. Vote: 8-4 (Feb. 1997)

8. Voted to utilize a dollar limitation to cap the risk factor created under the definition of mass market, Vote: 10- 3. (Feb. 1997)

Reporter's Notes:

1. Access contract includes the relationship that arises when there is a single access to the resource (e.g., web site) if, under ordinary contract law principles, access creates a contract . The relationships include contracts for use of E-Mail systems, EDI services by a provider, as well as web site contracts. The term refers solely to electronic access situations and does not cover attending movie theaters or the like. The term includes situations where a database in the possession of a licensee automatically updates by accessing or being accessed by a remote facility as in the following situation: Lexis provides an integrated environment where the software first queries an on-site copy of a CD-ROM then checks a local network update and obtains the latest information in a seamless internet or dial-up updating.

As outlined in the definition of "licensor", the model followed in three party access transactions, such as where the content provider makes content available through a third party access provider, entails two separate agreement and, in some cases, three separate contracts. The first is between the content provider and the on-line provider. This license may be an ordinary license to use the information or an access contract in itself. The second is between the on-line provider and the end user or other client. This is an access contract. The content provider is not necessarily party to or beneficiary of the contract. The third possible contract occurs when the content provider additionally contracts directly with or establishes terms with the end user or client.

2. Authenticate. This article replaces the traditional idea of "signature" or "signed " with a term that incorporates modern electronic systems, including all forms of encryption or digital symbol systems. Basically, the fact of authentication can be proved in any manner including proof of a process that necessarily resulted in authentication. Use of an "attribution procedure" agreed to by the parties per se establishes that a symbol or act constitutes an authentication.

Authentication differs from manifesting assent in this article. Authentication (signing) always constitutes manifesting assent, but the reverse is not true. For example, tearing open a package or clicking on an icon indicating assent may manifest assent, but does not constitute a signature.

3. Computer program. This definition parallels the federal Copyright Act.

4. Consequential damages. This article follows existing Article 2. Personal injury and property damage are a form of consequential damages; all other requirements being met. This section makes clear that, as under current law, property damage and personal injury damages are treated under a standard of proximate causation, rather than simply foreseeability.

The basic premise of consequential loss other than for personal injury and property damage is that it is attributable to a breaching party only if some level of foreseeability can be proven. Beyond that, the basic test for whether a type of loss falls within direct or consequential damage as a measure lies in the degree to which the loss is directly associated with a reduction in the value received through contract performance as contrasted to what was anticipated as measured by the values assigned to events under the contract itself. Thus, consequential damages include damages in the form of lost profit or opportunity, damages to reputation, lost value in confidential information because of wrongful disclosure or misuse, damages for loss of privacy interests associated with the contract, loss of data as a result of the operational defect, and like damages.

Most commercial contracts deal with exclusion or inclusion of consequential loss in practice and that negotiation process should be supported by a delineation, insofar as possible, of what falls into this category and what does not. The illustrations suggested above cover many relevant situations providing clarity for negotiation. The theme here is that consequential losses go outside the principle that the performance itself was less in quality than was agreed to by the parties.

This draft follows draft revisions of Article 2 on disproportionality. Draft Article 2 allows a court to reduce consequential damages if unreasonably disproportionate to the risk assumed by the breaching party. A motion to delete that phrase was defeated on the floor of the Conference.

5. Conspicuous. This definition follows existing law and adds new themes to deal with electronic contracting. As under current law, under Section 2B-115 whether a term is conspicuous is a question of law.

Current law in UCC ' 1-201(10) contains three safe harbors for making a clause conspicuous; these have been part of law for over fifty years. They serve a critical role in planning and drafting documents. As a general rule, a term that conforms to a "safe harbor" provision is held to be conspicuous. Many cases hold that failure to conform to a safe harbor may invalidate any claims to being conspicuous.

The idea of being conspicuous in a message to an electronic agent the reference is to whether the agent has the ability to act on the term; the term must be in a form that can be processed and understood by the computer. It need not be otherwise separated out. Computers do not respond differently to capital letters or lower case. The electronic message suffices if it is designed to invoke such a response from a "reasonably configured" electronic agent, a concept that will be spelled out in the commentary to indicate that it intends an analogous construct that parallels the reasonable man standard used for the general concept of conspicuous.

Revisions of Article 2 propose abolition of the safe harbor concepts present in current law. Article 2B follows existing law. The theme of conspicuousness blends both a notice function and a planning function giving certainty to the party preparing and using the term. It is equally important to ensure that the recipient of a record receives notice of the contents and that the party who reasonably desires to rely on the terms of the record can do so. Taking out all safe harbor language eliminates the second objective and jeopardizes the first.

6. Consumer: Existing Article 2 does not define "consumer." Article 9 focuses on persons acquiring property primarily for personal or household uses. European law uses a different approach and defines a "consumer" as one entering into a contract outside her business or profession.

This Draft focuses on the time of contracting to define the status of a party. The term "consumer" triggers restrictions on contracting. While most often, intent does not change from the time of contract to the time of delivery, when changes occur, a time of delivery focus would retroactively change the rules. The issue is important in Article 2B since many contracts in Article 2B are on-going relationships; a delivery concept might provide different characterizations of the same transaction at different points in time.

The Article 9 definition provides a template for this Draft. The Article 9 definition creates serious interpretation issues when used for transactions that are not security interests that have been encountered in case law outside Article 9. This Draft clarifies the focus and resolves some of those problems. Some personal uses are not consumer uses (see, e.g., a stock broker using database software to "personally" track billion dollar investments). Distinguishing these personal business uses and truly consumer uses holds great importance in Article 2B because software and other information can be used "personally" in traditional business contexts. The exclusions in the definition apply to profit-making, profession, or business use. In the modern economy where individuals can and often do engage in seriously significant commercial enterprises without the overlay of a large corporation, the personal use idea needs to respect and reflect the modern practice, especially in this area. The proposed definition distinguishes between persons using information in profit making and business uses and personal or family uses such as ordinary asset management for an ordinary family.

This issue has been considered in many areas of law that have evolved since the original definition of Article 9. The issues have proven to be difficult and subject to litigation under the Article 9 concept in lending, bankruptcy and other contexts. For example, a number of reported decisions focus on whether or when a purchase of stocks or limited partnership assets for investment purposes would be considered a consumer purchase since it might fall within the general reference to "personal" purposes. See, e.g., Thomas v. Sundance Properties, 726 F.2d 1417 (9th Cir. 1984); In re Manning, 126 B.R. 984 (M. D. Tenn. 1991) (UCC definition "not especially helpful on its face"). Some courts emphasize the difference between acquisition for "consumption (consumer)" and acquisition or use "for profit-making". This approach comes in part from the Truth in Lending Act which uses a definition of consumer debt much like the definition in Article 9 of consumer but additionally contains an express exemption for business transactions. The "profit-making" test has been applied in bankruptcy cases interpreting a Bankruptcy Code provision identical to the standard UCC definition. For example, the Fifth Circuit commented that "[The] test for determining whether a debt should be classified as a business debt, rather than a debt acquired for personal, family or household purposes is whether it was incurred with an eye toward profit." In re Booth, 858 F.2d 1051 (5th Cir. 1988). See also In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987) ("The farm operation is a business for the production of income. Debt used to produce income is not consumer debt "primarily for a personal, family or household purposes.").

7. Copy: This definition was designed to correspond to copyright law. In the Copyright Act, cases hold that a copy does not require permanence, but cannot be purely transitory, such as an image on a screen. Moving information into a computer memory makes a copy of that information.

8. Court: This definition extends the power to make choices to officers of non-judicial forums.

9. Direct damages: The Draft defines "direct damages" to provide guidance on the distinction critical to commercial practice that differentiates types of damages for disclaimer and other contract language. Direct damages are losses associated with a reduction of value or loss of value as to the contracted for performance itself, as contrasted to losses caused by intended uses of the performance or use of the results of the performance by the recipient outside the contract. Direct damages are measured in the damages formulae in this Article.

The definition rejects cases where courts treat as direct damages losses that relate to anticipated advantages outside the contract that were to flow from the use of the product. These are consequential damages. Thus, one case held that defects in a system under a contract that disclaimed consequential damages included all the lost benefits that the party expected from the deal (a total far in excess of the purchase price and incorporating what would ordinarily be consequential loss). The issue is: if we have software purchased for $1,000 which, if perfect, would give profits of $10,000 and the thing is totally defective, should the "value" of the software be considered to be "$10,000 or $1,000 as "general" damages? The answer here is $1,000. Similarly, if a virus in a program causes a $10,000 loss, but the program otherwise fully performs, should that $10,000 be direct or consequential loss? The draft adopts the view of most courts and treats this as consequential loss.

10. Electronic Agent: An electronic agent is a program designed to act on behalf of the party without the need for human review. As a general rule, a party adopting use of such agents is bound by (attributable for) their performance and messages. The term plays an important role in shaping responsibilities and how parties comply with various conditions, such as an obligation to make terms conspicuous. Courts may ultimately conclude that an electronic agent is equivalent in all respects to a human agent, but this Draft does not go so far, making specific provisions relating to electronic agents when needed. In this respect, the Draft is consistent with Article 4A as well as with modern practice. The accountability of a party for actions of a computer program may hinge on different issues than accountability for a human agent.

11. Electronic Message: This term has been broadened to parallel a definition used in the draft UNCITRAL Model Law and to expressly include reference to fax, telex and similar electronic transactions. The expansion serves an important purpose in reference to issues about when a contract is formed through electronic messages. The new terms, however, refer to qualitatively different subject matter in that pure electronic messages assume that a human will eventually read or react to the transmission. The expansion creates ambiguity in reference to defining whether contracts are formed when a human interacts with a computer or two computers interact with each other in the absence of human direct guidance.

The definition does not refer to a transfer from one system to another. In many cases, host computers handle data (e.g., email files) for both parties, and the message moves within the computer from one file to another. That type of transmission engages no policy issues different from the case of an actual communication of digital information from one location to another.

12. Financier: This definition provides the basis for the proposed integrated treatment of financing arrangements in this article. The definition covers both security interests and leases. The definition sets out coverage of what in other contexts are described as finance leases where the lessor, for purposes of financial accommodation, acquired a license which it then leases down to a licensee. Qualifying for finance treatment requires, under this definition, both notice to the licensor and actual agreement or assent by the licensee to the licensee. These requirements protect both the licensor and licensee's interests.

The exclusion in the second sentence deals with a circumstance unique to some finance leasing: the case in which the license is given to the financier and then transferred down to the financed party (licensee). This transaction will often violate the terms of transferability in a license. In this case, to qualify for coverage under the financier language, the party must give notice to the licensor of and financier status depends on making the financial accommodation conditional on the licensee's assent to the license terms. This protects both the licensor and the licensee.

13. Good Faith: The definition follows current Article 2 law and also extends the duty of good faith and fair dealing to consumers.

14. Informational content: This definition is intended to cover materials (facts, images) whose ordinary use communicates knowledge to a human being or organization. Thus, for example, in a database of images contained on a CD- ROM along with a program to allow display of those images, the program is not information content, but the images are. Similarly, when one accesses Westlaw and uses its search program to obtain a copy of a case, the search program is not content, but the text is within the definition. The reference here is to the effect of the information in its normal use.

15. Intellectual Property Rights: The definition is to be inclusive and capable of responding to new developments in national and international law, such as possible non-copyright database protections. With each area of law referenced here, the relevant law itself defines what rights are and are not covered. Whether this affects contract limitations pertaining to the information has been debated, but subject to misuse and other regulatory concepts that go beyond this statute, the general approach in courts is that a property right need not exist in order to have an enforceable contractual limitation. The concept covers rights created under any body of law, including federal law, state law, and the law of other countries. The definition of intellectual property rights does not include the right to sue for defamation or similar tort claims.

16. License: The essence of this definition lies in the conditional or limited nature of the contract rights. At least some conditions must be express, rather than implied. The distinction between an unrestricted sale of a copy and a license revolves around the terms of the contract as expressed, rather than on implied conditions. In an unrestricted sale of a copy, the transferee receives ownership of the copy, but if intellectual property rights apply to the information on the copy, is subject to implicit restrictions on use of the information derived from intellectual property law. In a license, whether or not ownership of the copy is transferred, the transferee is subject to express contract restrictions or receives a contract grant that expressly gives less than all rights in the information.

Some suggest that "implied licenses" should be included. These arise, for example, where a court holds that, to make the transaction reasonable in light of the parties' expectations, some rights or limitations not express should be inferred. Many such transactions are within this Article, including a transaction where some rights are implied in any otherwise conditional transaction. On the other hand, the Article does not include implied in law licenses such as under first sale rules in copyright. As noted by the Federal Circuit Court of Appeals, a sale can be made conditional on intellectual property rights (e.g., patent in that case) and, similarly, while a sale of a copy transfers some copyright rights under federal law, the licensor retains control of a great deal of the copyright law's exclusive rights even as to that copy. A license deals with control of rights of use and the like with reference to the information, while title to the goods deals simply with that - title to the goods.

17. Licensor and Licensee: These are generic terms. The terms refer to the transferee and transferor in a contract covered by this article. Obviously, the transferee in a license is not the employee itself, but the company that acquired contractual rights under the agreement. In the definition of licensor, several specific illustrations are used to avoid confusion in cases where more than one party transfers information, that is, where the parties exchange information or performance.

18. Mass-market transaction. This definition distinguishes between a mass market transaction and a mass market license, reflecting the fact that some mass market transactions covered by this Article may not involve a standard form contract. Since the decision was made to use the mass market concept in lieu of the concept of consumer in a number of situations where a form may not be involved, the broader term "transaction" was necessary to avoid excluding these transactions from various consumer protections.

19. Mass-Market License: This definition and the immediately prior definition distinguish between a mass market transaction and a mass market license, reflecting the fact that some mass market transactions covered by this Article may not involve a standard form contract.

The definition contemplates a retail marketplace where information is made available in pre-packaged form under generally similar terms. It applies to information that is aimed at the general public as a whole, including consumers. It would not cover products directed at a limited subgroup of the general public, such as members of a club or persons whose income exceeds a specified level. Where the line will be drawn in determining the size of the subgroup that would qualify for a general public distribution cannot be answered absent judicial consideration of specific cases. However, the intent is that the products covered here do not include specialty software, information directed to specially targeted limited audiences, or professional use software, but materials that appeal and intend to appeal to a general public audience as a whole where the identity and status of the eventual licensee is irrelevant

This captures most of a true retail setting, such as transactions in department stores or the like. Article 2B will be the first UCC article to extend consumer-like protections to business transactions in any form and the first to tailor at least some default rules based on that concept. The goal is to do this in a limited manner, reflecting the innovative nature of the concept, while confining the risk created by focusing on small transactions for information oriented toward the broad general public.

The dollar limit should be selected based on empirical evidence relating to the pricing structure of modern software transactions. In a review of several sources, few items of consumer software exceed $200. The price curve is downward, rather than increasing. A $500 limit would far exceed the average cost of retail business software. As of the date that this Draft was prepared, the Committee had not voted on the dollar amount.

The definition excludes any non-consumer transaction that exceed the dollar limit as to the particular item. In a situation where items of software are bundled together and with hardware, the dollar limitation applies to each item separately. In this bundled transaction respect, however, it should be noted that the decision in Article 2 to not utilize a mass market theory creates a potential anomaly: The items of software will most likely be mass market and subject to the provisions of 2B-308, while unless the purchaser is a consumer, the hardware would not be subject to the analogous provision in Article 2.

The other business exceptions identify situations involving site licenses, typical performance licenses (e.g., ASCAP, Broadcast Music) and situations where the licensor provides customization of the product, rather than transferring it essentially of the shelf.

This Draft proposes a bifurcated treatment of on-line (Internet) transactions. Most consumer transactions on Internet fall within the definition and a vast number of consumer transactions occur on Internet. It is especially important however, with this new transactional environment, to not regulate business transactions.. The approach in this Draft is to exclude from the definition of mass market any online transaction not involving a consumer. This gives the online industry room for expansion and growth not subject to unintentional regulations, while preserving consumer protections in that environment.

20. Receive: This definition covers receipt of messages and performance in an information contract. Electronically, the occurrence of receipt hinges on sending the electronic record or information to a designated system in a form capable of being processed by that system. The draft places the burden of determining what format is appropriate for that system on the person sending the message or performance. One Commissioner suggested that this should be reversed to place the burden on the recipient to designate the form and, failing that, to allow receipt even if not capable of being processed by the system. Consider: I order a copy of Lotus Notes from IBM and direct them to transfer the copy electronically to my computer which is a Compaq, but I forget to mention that fact. They do so, but the software is in Apple format. Have I received performance?

21. Sale: With respect to information, a distinction is made between title to the copy and title to the intellectual property rights. Title to information essentially means that the transfer is free of any restrictions, express or implied, on the use, reproduction or modification of the information.

22. Standard form: Standard forms are a major part of consumer and commercial practice. As to questions about the enforceability of particular terms and questions of assent to the overall form, standard form issues are expressly dealt with in the Restatement (Second) and in the UNIDROIT Principles. Existing Article 2 does not contain any express treatment of forms. In the revision process, initially both Article 2 and 2B contained provisions dealing with when a party assents to a form. Subsequently, the Article 2 committee deleted the concept. Subsequently, ALI Council recommended that this decision be reversed. Article 2B has contained provisions dealing with standard forms since the beginning of the drafting process.

The reference in this definition is to forms (e.g., groupings of standard terms) whose use in modern commerce is not only widespread, but virtually ubiquitous. The idea expressed does not hold that a record that contains language previously used in other transactions falls within the term and it does not focus on individual "standard terms." The record, which contains a composite of terms, must have been prepared for repeated use is a standard form whose legal significance is judged accordingly.

SECTION 2B-103. SCOPE.

(a) This article applies to licenses of information and software contracts whether or not the information exists at the time of the contract or is to be developed or created in accordance with the contract. The article also applies to any agreement related to a license or software contract in which a party is to provide support for, maintain, or modify information.

(b) Except as otherwise provided in subsections (c) and (d), if another article of this [Act] applies to a transaction, this article does not apply to the part of the transaction involving the subject matter governed by the other article except to the extent that this article deals with financial accommodation contracts.

(c) If a transaction involves both information and goods, this article applies to the information and to the physical mediummedia containing the information, its packaging, and its documentation, but Article 2 or 2A governs standards of performance of goods other than the copies, packaging, or documentation pertaining to the information. If a transaction includes information covered by this article and services outside this article or transactions excluded from this article under subsection (d)(1) and (2), this article applies to the information, physical medium media containing the information, its packaging and documentation. A transaction excluded from this article by subsection (d)(3) is governed by Article 2 or 2A.

(d) This article does not apply to:

(1) a contract of employment of an individual who is not an independent contractor, a contract for performance of entertainment services by an individual or group, or a contract for performance of professional services by a member of a regulated profession with respect to services commonly associated with regulated aspects of that profession;

(2) a license of a trademark, trade name, or trade dress, or of a patent and know-how related to the patent unless the license is or is part of a software contract, a license of a motion picture license, an access contract, or database contract;

[(3) a transaction the subject matter of which is information that represents money or deposit accounts;] or

(3) a sale or lease of a copy of a computer program that was not developed specifically for a particular transaction and that is embedded in goods other than a copy of the program or an information processing machine, if the program was not the subject of a separate license with the buyer or lessee.

Committee Votes:

a. Voted 10-3 to reject a proposal to limit the scope of the article to "coded", "digital", "electronic" or similar concept.

b. After initially rejecting the motion, on reconsideration, the Committee voted 10-0 to limit scope to licenses of all information and software contracts.

c. Voted 9-3 to reject a motion to include all patent and trademark licenses in the Article.

d. Voted 8-4 to reject a motion to include all patent licenses. (Feb. 1997)

e. Voted 7-4 to reject a motion to delete (d)(2). (Feb. 1997)

[This draft contains two changes responding to a letter received from Citibank regarding scope. The first defers on subject matter, rather than coverage, to the other articles of the UCC. The second is in the bracketed language in proposed new subsection (d)(3) which excludes coverage of money and deposit accounts. Under this exclusion, if software is licensed to allow access to bank or other funds on deposit under a depository agreement, the software license is in Article 2B, but the transactions regarding the funds in the account and the terms of the despoit account itself are not covered. Under current law, the funds-depositor relationship is regulated, while the software contract is not. The Committee should also note proposed changes in 2B-308 dealing with the effect of disclosures that conform to state or federal disclosure rules and allowing that disclosure to exclude application of the refusal term concept in 2B-308(b).]

Reporter's Notes:

1. This article deals with transactions involving the copyright industries. These industries play a major role in the modern information age. The article does not cover all contracts in these industries, but focuses on licenses and emphasizes transactions in those industries whose current or future direction deals with digital products. The article does not deal with sales of books, newspapers or traditional print media sold over the counter since, except for transactions involving computer software, the scope of the article is limited to licenses. Article 2B-102 defines a license as a transaction that expressly conditions or limits the rights conveyed. Implied conditions, which are present because of copyright law, in any sale of a copyrighted product, are not in themselves adequate to fall within the scope of the article.

2. As in every context in which digital and other modern information technologies have had significant impact, they create difficult problems of placing the new technologies and technology products within existing legal and social categories. That issue affects tax law, communications law, intellectual property law, and many other fields. It affects the delineation of Article 2B scope. This article reflects extensive discussion by the Committee. The Committee rejected proposals to limit the scope to digital information. Modern convergence of information technologies makes reference to digital or a similar term an unworkable scope definition and its linkage to a specific technology makes the long term viability of such a focus suspect. The Committee opted to focus on licensing and software contracts. Common to these transactions is that the focus concerns information (rather than goods), even if transferred in a tangible copy (e.g., newspaper, diskette, book/manual) and that there are conditions on use or access in the transaction.

3. For transactions in information other than software, this article distinguishes between a license and a sale of a copy. Exclusion of sales of copies of information leaves undisturbed major segments of the traditional information industry, such as contracts involving a sale of a copy of a book or a newspaper. The distinction between a license and a sale of a copy in the information industry is as explicit as the distinction between a sale and a lease in goods. This section uses a transaction characterization consistent with practices in those industries.

For computer software, the more important factor involves the nature of the product. With the exception of some limited types of software products, all transactions whether licenses or sales are subject to either express or implied limitations on the use, distribution, modification and copying of the software. These limitations are commercially important because (unlike in reference to newspapers and books) the technology makes copying, modification and other uses easy to achieve and essential to even permitted uses of the software. Bringing all transactions involving this subject matter into Article 2B reflects the functional commercial similarity of the transactions and the need for a responsive and focused body of law applicable to these types of products. In addition, as a relatively new form of information transaction involving products with distinctive and unique characteristics, no common law exists on many of the important questions with reference to publisher and end user contracts regardless of whether a transaction constitutes a license or a sale of a copy.

4. Subsection (b) discusses interface issues. For transactions governed within the trio of UCC transactional articles (2, 2A and 2B), the primary rule applies each to its particular subject matter. This is the "gravamin of the action" test followed in some states under Article 2 in making distinctions between transactions in goods and transactions in services. It rejects the "predominant purpose" test for this issue. The primary exception occurs in reference to software embedded as discussed in (d)(3). Subsection (b) allocates coverage for mixed transactions where the non-covered aspects are not goods. In all cases, this Article covers the information issues within its scope, while other law governs for other aspects of the transaction. No predominant purpose test is intended even with reference to transactions part of which fall entirely outside the UCC.

5. Based on a suggestion from the floor of the annual meeting, comments will make it clear that manuals delivered in connection with software are covered under Article 2B.

6. The exclusion in subsection (d)(1) deals with employment contracts and with services agreements related to entertainment (e.g., actor, musical group performance, producer, etc.). The excluded cases involve personal services contracts and require much different default rules than here. The entertainment services exclusion covers both direct contracts with individuals and the various structures under which a party hires services of an individual or group through a loan contract with a legal entity with whom the individual or group is employed. This subsection also excludes professional services to avoid confusion between and the regulatory standards of regulated professions. The exclusion only pertains to regulated services and not to other contracts or services (e.g., law firm web site where legal advice is not given is treated the same as any other web site).

The motion picture and publishing industries have suggested that the Committee consider exclusion of talent and author contracts generally (e.g., the upstream portion of the industry).

7. Subsection (d)(2) excludes patent and some other pure intellectual property licenses. The rationale for exclusion lies in the differences between copyright and digital licensing and practices in unrelated areas of patent law. Patent licensing relating to biotech, mechanical and other industries entails many different assumptions and standard practices that are not contemplated by this draft. The article concentrates on a more focused area of commerce. In practice, however, one can anticipate that courts will apply by analogy aspects of this Article to other fields of licensing. The comments will discuss the role of application by analogy of this Article in context of the history of reasoning by analogy in other contexts. See, e.g., the discussion of applying Article 2A to leases of other personal property.

8. Subsection (d)(3) excludes computer programs such as airplane navigation or operation software, software that operates automobile brake systems, and the like. Transactional issue relating to this type of software are governed by the law governing the transaction in the entire product (e.g., Article 2 or Article 2A).

SECTION 2B-104. TRANSACTIONS SUBJECT TO OTHER LAW.

(a) Subject to subsection (b), the conflicting law governs in the case of a conflict between this article and:

(1) a law of this State establishing a right of access to or use of information by compulsory licensing or public access or a similar law;

(2) a law of this State regulating purchase or license of rights in motion pictures by exhibitors; or

(3) a consumer protection law of this State.

(b) If a law referred to in subsection (a) existing on the effective date of this article applies to a transaction governed by this article, the following rules apply:

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

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

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

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

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

Committee Votes:

a. The Committee voted 11-1 to approve the section subject to adjustments of section (b)(4) which have subsequently been made. (September, 1996)

Reporter's Notes:

1. Subsection (a) reflects the diversity of statutory and common law regulation of aspects of law relating to information assets. This article centers on contractual arrangements and does not affect property rights. It does not disturb regulations that compel disclosure or other access to the materials. This Article leaves undisturbed the law relating to privacy and personality rights. While these rights may be the subject of a license within this article, the underlying property right is not affected. For example, a state may hold that individuals have rights to control use of data concerning them. A licensee of a database of addresses would have to deal with the fact that each individual may be the required licensor. This article would not affect those rights, but deals with contract terms and remedies. While privacy and public access laws are especially relevant for the increasing commercial use of information, this article deals with contract law, not property rights and, thus, leaves to these other contexts the development of appropriate rules on information as property. As recommended by a bar association group, the comments to this section will contain illustrations suggesting the type of statutes referred to in subsection (a)(1). Given the functions of subsection (a), the draft should perhaps include in comments of text a reference to professional regulations in a transaction involving a lawyer or medical professional within this Article.

Subsection (a)(3) excludes preemption by Article 2B of the various state laws that regulate so-called blind bidding and other practices specifically relevant to the motion picture industry. As with consumer legislation, these statutes were developed through extensive discussion and policy making and they should not be disrupted or affected by Article 2B. This section reflects that, as to consumer law, the preservation of rules covers both statutory and case law. This brings Article 2B into conformity with Article 2A and draft Article 2.

2. The Article is also subject to preemptive federal law. Federal intellectual property law contains some contract rules, but does not generally preempt state contract law. Instead, licensing law has traditionally been largely relegated to state law. When this is not true, of course, federal law controls. This draft does not refer to the preemptive effect of federal law for reasons of style, since the principle of preemption is clear.

3. Subsection (b) deals with the balance between the modernization themes developed in Article 2B relating to electronic contracting and existing law regulating of contract law in consumer or similar restrictions. The balance must preserve important policies and diversity (thus, the principle of general non-reversal) of these laws, but should extend the effectiveness of innovations in electronic contracting. The approach here sets out a presumption that the other law controls, but identifies aspects of other law where it is appropriate to reverse that presumption as to particular rules based on a legislative judgment that the electronic contract provisions of this Article are appropriate state policy. Digital signature laws adopted in Washington, Utah, and as proposed in other states, adopt a similar reconciliation approach, defining acts that comply with their requirements broadly to comply with writing, signature and similar requirements in all state laws. This Draft is more limited in impact, narrowing the changes to center on manageable and identified parameters of existing law without attempting to alter the entire world of signatures, assent and the like.

4. The goal is to facilitate electronic commerce and to implement concepts concerning electronic trade. Article 2B expands the idea of a writing and a signature to include, respectively, a record and an authentication. Conspicuous is defined to deal with electronic contexts and expanded by an enhanced concept of manifestation of assent. In these respects, electronic concepts that were not at issue when existing consumer law developed, require adjustments appropriate to promote uniformity and certainty in commerce that is truly national in nature, while preserving the intent of the regulations. There is no effort to alter content terms, such as whether a disclaimer can be made, what language must be used, and like issues.

5. Subsection (b)(4) does not cover cases where state law requires negotiation of a term. Negotiation requirements entail a mandate that a party actually dicker over a term with there being an actual and direct exchange and alteration of positions, the concept of manifesting assent does not meet this.

6. In final form, the structure of Article 2B must reflect some state's constitutional and other laws that preclude general revision without specific authorization, of laws outside the particular enactment. This can be achieved through a legislative note.

SECTION 2B-105. APPLICATION TO OTHER TRANSACTIONS.

(a) Except in a mass market transaction, in an agreement represented by a record:

(1) Pparties to a transaction not governed by this article may elect by agreement to have all or part of this article apply to the transaction; and

(2) if the agreement is in a record that is not a mass-market license. if part of a transaction is governed by this article and part is governed by other law, the parties may provide that the transaction is to be governed entirely by this article or by the other law.

(b) The agreement is effective to the extent that it deals with issues that the parties could resolve by agreement.

Committee Vote:

a. Voted 7-4 to replace consumer contract with mass market contract.

[Note to this Draft: The section was restructured for clarity. Language in (a)(2) was added to deal with an issue raised by several observers where transactions involve mixed law and permits an opt in/ opt out option where the parties may desire to be entirely governed by one or the other body of law. The language in (a)(2) has not yet been reviewed by the Drafting Committee.]

Selected Issue:

a. Should there be provision in an on-line environment to allow opt-in to Article 2B by manifesting assent to the opt in term based on suggestions by a White House study group that there be an opportunity to elect into a uniform law tailored to electronic environments?

Reporter's Notes:

1. This section expresses an approach generally assumed to be current law based on the theory of party autonomy in contracting. A contractual election to apply this article is analogous to a choice of law term selecting the law of a particular state. By agreement, parties can determine, for example, that the warranty rules of this article are more appropriate in a contract involving services than are common law or Article 2 warranties. If there are no fundamental policy barriers precluding use of these rules, the choice of law made by contract governs.

2. In addition to validating party autonomy, however, this section exempts out mass market contracts from the reach of the ability to contract into this UCC section. The exclusion, which was originally restricted to consumer contracts, assumed that the party to a mass market agreement is not likely to understand differences in law. In most states under current law, a similar theory does not apply in cases where a consumer contract makes a choice of law unless fundamental policies of the state are circumvented by the choice. This section thus implements a form of extended consumer protection and applies it to both consumers and businesses operating in the mass market. Restrictions of this type, if appropriate for consumers, are not typically expanded to business parties under current U.S. or European law.

SECTION 2B-106. LAW IN MULTI-JURISDICTIONAL TRANSACTIONS.

(a) A choice-of-law term in an agreement is enforceable.

(b) If an agreement does not have an enforceable choice-of-law term, the following rules apply:

(1) In an access contract or a contract providing for delivery of a copy by electronic communication, the contract is governed by the law of the jurisdiction in which the licensor is located when the contract becomes enforceable between the parties[transfer] [activation] of rights occurred or was to have occurred.

(2) A consumer contract not governed by subsection (b)(1) which requires delivery of a copy on a physical medium to the consumer is governed as to the contractual rights and obligations of the parties by the law of the jurisdiction in which the copy is located when the licensee receives possession of the copy or, in the event of nondelivery, the jurisdiction in which receipt was to have occurred.

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

(c) If the jurisdiction whose law applies as determined under subsection (b) is outside the United States, subsection (b) applies only if the laws of that jurisdiction provide substantially similar protections and rights to the party not located in that jurisdiction as are provided under this article. Otherwise, the rights and duties of the parties are governed by :

(1) the law of the jurisdiction in the United States or in the country in which the licensor does business and has the most substantial relationship toconnection with the transaction.; or

(2) if no such jurisdiction exists, the law of the jurisdiction in the United States in which the licensee is located.

(d) 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; Section 1-105; Section 9-103.

Committee Votes:

a. Voted 9-1 to use consumer, rather than mass market.

b. Voted 8-5 to adopt alternative A of subsection (a) validating contract choice of law. (Feb. 1997)

c. Voted 11-0 to adopt significant relationship test as back-up rule. (Feb. 1997)

[Notes to this Draft: Most of the changes in this Draft involve mere editorial clean-up. Language in (b)(2), however, was added to clarify that this Draft does not alter or affect the treatment of tax liabilities. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992) the Supreme Court held that no adequate nexus for tax purposes was established where the only contact of an entity with a state was advertising and delivery through common carrier. This Article, of course, deals only with contract issues. An alternative form of avoiding confusion would simply be to state that this does not relate to tax collection issues.]

Reporter's Notes:

1. There are two questions addressed in this section. The first deals with enforceability of contract provisions choosing the applicable law for a contract and the second deals with choice of law in the absence of a contract term dealing with the question.

2. Choice of law clauses are routine in commercial licenses. They select what state's law applies. Subsection (a) validates choice of law agreements, thus adopting a strong, contract choice position. Law outside this statute might restrict the ability of commercial parties to choose their law if the choice infringes fundamental policy of the forum state. This Article does not alter that policy or the applicable over-riding law. But few of the cases discussing this deal with anything other than a consumer transaction. A prior Section of this Article makes clear that those consumer policies and rules are not disturbed by Article 2B.

A rule that validates choice of law agreements states an important policy choice in a context where an increasing number of modern information transactions occur in cyberspace, rather than in fixed environments. Because many transactions in this field are not easily related to tangible locations, the ability to fix an appropriate choice of law provides an important contract drafting premise. The Committee in January, 1996 expressed strong support for this premise and, indeed, it reflects the clear trend of modern law. The rule enhances certainty of contract on choice of law rules in Article 2B under the principle of freedom of contract. It was strongly supported by ABA representatives.

Subsection (a) makes the clause enforceable, subject, implicitly, to concepts of unfair surprise, conscionability, duress, and other general law theories. Except in Article 2A and cases of consumer regulatory statutes, no current uniform law in the U.S. precludes enforcement of contract choice of law on issues that a contract could control. Neither the Restatement, current Article 1 or Article 2, nor revised Article 2 place special restrictions on choice of law.

3. Common law generally enforces contractual choice of law in transactions involving intangibles. See Finch v. Hughes Aircraft Co., 57 Md. App. 190, 469 A.2d 867, 887, cert den 298 Md. 310, 469 A.2d 864 (1984), reh. den. 471 U.S. 1049 (1985) (patent license); Medtronic Inc. v. Janss, 729 F.2d 1395 (11th Cir. 1984); Universal Gym Equipment, Inc. v. Atlantic Health & Fitness Products, 229 U.S.P.Q. 335 (D. Md. 1985); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st Cir. 1993). The major exception occurs where the choice contradicts the basic policy of the state that would otherwise have its law apply, but reported cases outside of consumer or other regulated contracts often go relatively far to avoid finding such fundamental policies. Shipley Co., Inc. v. Clark, 728 F. Supp. 818, 826 (D. Mass. 1990). The Restatement (Second) allows choice of law terms to govern in any case (including consumer contract) where the issue could be resolved by contract. In addition, even if contract rules might not otherwise govern, under the Restatement, the contract choice is presumed to be valid, subject to limited exceptions. Restatement (Second) of Conflict of Laws ' 187 (may be invalid if not resolvable by contract and either there was no "reasonable basis" for the choice of that state's law, or "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue."

4. Article 1-105 currently allows a choice of law clause only if the chosen state has a "reasonable relationship" to the transaction. This rule is more restrictive than the Restatement and the other law of most states outside Section 1-105. It reflects law that existed when the UCC was adopted five decades ago, but that has little merit in modern electronic transactions and does not fit with modern scholarship about choice of law as reflected in the Restatement (Second) and elsewhere. That rule is anomalous applied to transactions involving general commercial behavior. Article 2A provides a limited rule for consumer leases, restricting the choice of law to the jurisdiction in which the lessee resides on or within thirty days after the contract becomes enforceable. ' 2A-106. That rule is inappropriate for the intangible property involved in the subject matter of this article. It would create a situation in which an on-line provider would be subject to the law in all fifty states and unable to resolve this even by contract. That would be true even if no discernible consumer protection interest justified the contractual choice limitation.

The residence rule does not exist under Article 2, Article 1 or the Restatement. As a consumer protection, it assumes that the domicile is more protective than any other state law. As a matter of logic, that cannot be true in all cases. In an information marketplace and especially in cyberspace transactions, the residence rule harms the consumer as often at it helps her. I Internet environments, it clearly frustrates goals of providing uniformity and being able to control the number of divergent laws with which a contract must comply.

Illustration 1: AOL provides on-line services throughout the United States and has its chief offices in Virginia. Under the proposed draft, in a contract with a consumer who resides in Oklahoma, the contract may choose the law of Virginia (licensor location) or Oklahoma (licensee residence). If it purports to choose Alaska law, that choice of law is enforceable except to the extent that it denies the licensee fundamental protections that would be available to it under Virginia or Oklahoma law outside this Article.

5. The second issue involves choice of law in the absence of contract terms and is covered in subsection (b). The purpose of stating choice of law rules is to enhance certainty against which the parties can bargain for different terms if they so choose. Under general law, choice of law principles are often driven by litigation concerns and refer to questions about "reasonable relationship", "most substantial contacts", and "governmental interest." In the online environment, this does not support commercial development and creates substantial uncertainty.

6. The most important rule is in (b)(1). It deals with electronic transactional environments and creates a presumptive choice of law based on the location of the licensor. This concept has been extensively discussed in reference to online environments. Where an on-line vendor automatically provides direct marketing to the world through Internet, any other formulation would require the vendor to comply with the law of fifty states and 170 countries since it will often not be clear where the information is being sent. Some states or countries mandate such compliance through local laws, such as for example, recent amendments to California warranty law applicable to the sale of goods. By opting for a more stable, identifiable source of underlying law is an important step toward facilitating electronic commerce in digital products. As described in this section, the licensor's location refers to its chief executive office (as in Article 9), rather than the location of the computer that contains or provides the information.

7. Subsections (b)(2) and (b)(3) deal with more traditional environments. Subsection (b)(2) creates a consumer rule for cases of physical delivery of copies (not involving online contracts). The rule chosen focuses on the location where the copy is received. In most, but not all cases, of course, this will be the state in which the consumer resides. That location would typically be chosen under any choice of law regime, but this section makes the choice clear. Thus, for example, a consumer acquiring software in Chicago will be subject to the law of Illinois in the absence of contract terms. That rule is consistent with concerns about the "place of performance" and like considerations under current law. It is also followed in many European consumer protection rules relating to contract choice of law involving sales of goods and services. This rule deals with situations in which the licensor will know where delivery will occur because it delivers a physical copy and is not engaged in an electronic communication. This allows electronic transactions to be governed by a choice of law rule that enables commercial decision-making based on an identifiable body of law and does not impose costs on the transaction by requiring that the electronic vendor determine what physical location corresponds to an electronic location.

Subsection (b)(3) states the residual rule, applicable to consumer cases where no copy is delivered and the deal is not an online performance, and to commercial contracts where no choice of law clause was agreed to by the parties. The section adopts the Restatement (Second) test. The Restatement (Second) of Conflicts uses a "most significant relationship" standard to be judged by considering a variety of factors that include: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. (f) the needs of the interstate and international systems, (g) the relevant policies of the forum, (h) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (i) the protection of justified expectations, (j) the basic policies underlying the particular field of law, (k) certainty, predictability and uniformity of result, and (l) ease in the determination and application of the law to be applied. Restatement (Second) '' 6, 188.

This theme is not the universal rule in choice of law. Many states continue to use principles from the Restatement (First) and theories evolved by academic authors. One text describes the situation as follows: "[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. [Like] revolutionaries who can unite only to eliminate the existing government, they cannot agree on the establishment of a new one. The disarray in the courts may be worse. Four or five theories are in vogue among the various states, with many decisions using - openly or covertly - more than one theory." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). The wide-ranging disarray approaches argues for providing guidance in this contractual environment for contract drafting and planning in cyberspace.

8. Subsection (c) provides a rule in cases of foreign choices of law where the effect of using the licensors location would be to place the choice of law in a harsh, under-developed, or otherwise inappropriate location. This is intended to protect against conscious selections of location designed to disadvantage the other party and forum shopping by U.S. companies who have virtually free choice as to where to locate. It is especially important in context of the global internet context.

SECTION 2B-107. CHOICE OF FORUM. The parties may choose an exclusive judicial forum. However, [other than in an access contract for informational content or services,] in a consumer contract the choice is not enforceable if the chosen jurisdiction would not otherwise have jurisdiction over the consumer and the choice [unfairly disadvantages] the consumer. A choice of forum in a term of an agreement is not exclusive unless the agreement expressly so provides.

Uniform Law Source: Section 2A-106.

Committee Votes:

1. Rejected a motion to delete the section. VOTE 4 - 9 (February, 1997).

2. Voted to adopt the term consumer and not "mass market" VOTE: 8-5 (February, 1997)

3. Consensus that Draft should deal separately with arbitration clauses if at all. (February, 1997)

[The bracketed language relating to unfair disadvantage retains an issue that will be addressed over the summer. The intent is to conform to Supreme Court holdings in reference to what type of limits on choice of forum are appropriate. Language from Cruise Lines and other decisions will be examined for what term should be used and for the elements of fairness that are considered The bracketed language relating to access contracts refines a concept that was discussed without objection by the Committee in February, 1997, but was left out inadvertently in the March Draft.].

Selected Issue:

a. Should the choice of forum be validated in Internet transactions, independent of the consumer or other issue under the rationale in Cruise Lines?

Reporter's Notes:

1. This section deals with choice of an exclusive judicial forum. It does not cover contract terms that permit litigation to be brought in a designated jurisdiction, but do not require that result. Although earlier case law viewed forum choices with some disfavor, the trend of modern case law enforces choice of forum clauses, even if in standard form contracts, so long as enforcement does not unreasonably disadvantage a party. Since 1972, courts have shown an increasing willingness to enforce this type of contract provision, subject to due process restrictions. See Bremen v. Zapata Offshore Co., 407 U.S. 1, 10 (1972) (choice of forum clauses are "prima facie valid"). This case law does not differentiate between standard form and nonstandard contracts. See Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991). However, constitutional concerns about fairness and notice may provide a limiting role. Thus, the US Supreme Court held that a choice of arbitration under New York law in a standard form contract could not be enforced to apply New York law prohibiting punitive damage awards in arbitration where that substantive effect was not highlighted or brought to the affected party's attention. Similarly, some courts hold such clauses to be unenforceable where they impinge on concepts of fundamental unfairness. See also Perkins v. CCH Computax, Inc., 106 N.C. App. 210, 415 S.E.2d 755 (1992); Lauro Lines v. Chasser, 490 U.S. 495 (1989); Sterling Forest Assocs., Ltd. v. Barnett-Range Corp., 840 F.2d 249 (4th Cir. 1988).

2. The importance of choice of forum provisions in transactions in modern cyberspace was highlighted by a series of cases involving jurisdictional issues on Internet and related online environments. See, e.g., CompuServe v. Patterson, 89 F.3d 927 (6th Cir. 1996). (allowing jurisdiction of Texas provider in Ohio because of contract contacts with Ohio online provider). The Supreme Court enforced a choice of forum in a standard form contract even though the choice effectively denied a consumer the ability to defend the contract and the choice was contained in a non-negotiated form and not presented to the consumer until after the tickets had been purchased. See Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991). The Court's comments have relevance to Internet contracting, a major issue in Article 2B:

[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.

3. This section provides separate protection for consumers where the risk of over-reaching is more severe. Protection of this sort may already exist in applicable state consumer protection law. The purpose of the exception is to protect the individual, not to deal with a market place or transactional issue. This is especially important as information commerce goes more and more online. If online transactions in the internet are generally equated to mass market transactions, using that term here would seriously affect the ability of providers to control risk in world wide distribution.

4. Article 2A restricts the validity of choice of forum in consumer cases. ' 2A-106. Neither Article 2, nor Article 1 deal with choice of forum contracts.

5. The term "unfairly disadvantage" is adopted here on a tentative basis, pending further research in applicable case law. The intent is to track modern case law on choice of forum clauses based on due process, unfairness and other grounds.

6. Comments to this section will make it clear that the section does not deal with arbitration or other alternative dispute resolution clauses. The law regarding that field is characterized by substantial federal preemption and specific, existing state law rules that should not be disturbed here. The Drafting Committee instructed the Reporter to prepare a separate provision dealing with arbitration clauses.

SECTION 2B-108. BREACH OF CONTRACT.

(a) Whether a party is in breach of contract is determined by the terms of the agreement and by this article. Breach occurs if a party fails to perform an obligation timely or exceeds a contractual limitation on use of licensed information.

(b) A breach of contract is material if the contact so provides. In the absence of express contractual terms, a breach is material if the circumstances, including the language of the agreement, reasonable expectations of the parties, the standards and practices of the trade or industry, and character of the breach, indicate that:

(1) the breach caused or may cause substantial harm to the aggrieved party including imposing costs that significantly exceed the contract value;

(2) the injured party will be substantially deprived of the benefit it reasonably expected under the contract: or

(3) the breach meets the conditions of subsection (c).

(c) A material breach of contract occurs if the cumulative effect of nonmaterial breaches by the same party satisfies the standards for materiality.

(d) If there is a breach of contract, whether or not material, the aggrieved party is entitled to the remedies provided for in the agreement and this article.

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

Committee Votes:

a. Adopted a motion to delete list of events that are material. Vote: 11 - 0 (Feb. 1997)

Reporter's Notes:

1. This Article distinguishes between ordinary (insubstantial) breaches and material breach. The objective is to correspond the treatment of this issue with the treatment of materiality under current common law, including the Restatement (Second) of Contracts. In contrast, Article 2 revisions use a reference to "substantial impairment" presumably to avoid common law concepts about material breach.

2. Subsection (a) defines breach. The definition is intended to be inclusive. Breach occurs whenever a party acts or fails to act in a manner required by the contract. Encompassed within this term are failures to make timely performance, breach of warranty, late delivery, repudiation, non-delivery, and exceeding contractual limitations, etc. What is and is not a breach is determined by the contract and, in the absence of contract terms, by this Article.

3. Subsection (b) defines material breach. "Material breach" parallels the idea of substantial performance; the two phrases are interchangeable.(See Section 2B-102 which defines substantial performance as "performance of a contractual obligation in a manner that does not constitute a material breach of that contract.") The general common law concept of materiality engages a combination of factors oriented toward determining the significance of the breach in context of the actual relationship of the parties. The factors listed in subsection (b) are not exclusive. Courts should be free to draw on common law cases as well as their view of the circumstances in light of the purpose of distinguishing between material and non-material breach. The concept incorporates questions about the motivation of the breaching party. A series of minor breaches may constitute a material breach where the motivation for this conduct involves a bad faith effort to reduce the value of the deal to the other party or to force that party into a position from which it will be forced to relinquish either the entire deal or, through re-negotiation, aspects of the deal that are otherwise important to it.

4. Material breach and substantial performance rules apply under current law to all transactions not governed by the Article 2. See Rano v. Sipa Press, 987 F.2d 580 (9th Cir. 1993); Otto Preminger Films, Ltd. v. Quintex Entertainment, Ltd., 950 F.2d 1492 (9th Cir. 1991) ("a breach of a contract is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance"; this was met where there was an accounting failure and failure to complete colorization of movies); Compuware Corp. v. J.R. Blank & Associates, Inc., 1990 WL 208,604 (N.D. Ill. 1990) (Materiality hinges on the cause and the effect of the breach; it involves the assumption the allegedly injured party performed properly to enable the other's full performance.).

5. Common law distinguishes between material and a non-material breach. The basic theme lies in the fact that, while parties are entitled to the contract performance for which they bargained, some breaches are sufficiently immaterial that they do not justify forfeiture of the entire bargain. For example, a one day delay in payment may or may not be material. A reasonable failure to fully meet advertised performance expectations of handling 10,000 files may not be material where the licensee's needs never exceed 4,000 if the system handles 9,999.

6. Materiality does not affect whether a party has a remedy, but what remedies are available. Breach entitles the injured party to remedies provided in this article or in the contract. What remedies are available depends on whether the breach is material or nonmaterial. The material breach concept rests on the common law belief that it is better to preserve a contract relationship in the face of minor performance problems and the related belief that allowing one party to cancel the contract for minor defects may cause unwarranted forfeiture and unfair opportunism. Materiality relates to the injured party's perspective and to the value that it expected from performance. Faced with only a nonmaterial breach, the injured party can recover for damages that arise in the ordinary course as a consequence of the breach, but cannot cancel the contract or reject the tender of rights unless the contract expressly permits that remedy. Faced with a material breach, a wider panoply of remedies is available to the injured party, including the right to cancel the contract. This Article carries the distinction throughout and with respect to both parties to a contract, except that a different standard applies to mass market transactions involving a refusal of a single delivery of software where the Article follows existing Article 2 and, rather than inquiring whether the breach is material, in that case asks merely whether the product conformed to the contract.

7. One cannot define materiality in absolute terms any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The conce