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INTRODUCTION

Article 2B deals with transactions in information; it focuses on transactions relating to the "copyright industries." This project lies at the heart of maintaining the U.C.C. at the center of commercial contract law.1 The significance of Article 2B has been recognized. See Intellectual Property and the National Information Infrastructure, The Report of the Working Group on Intellectual Property Rights, at 58. ([the] challenge for commercial law . . . is to adapt to the reality of the NII by providing clear guidance as to the rights and responsibilities of those using the NII. Without certainty in electronic contracting, the NII will not fulfill its commercial potential."). That report endorsed the Article 2B project. Subsequent statements by the White House embody the assumption that private contract, rather than regulation should guide the new economy and that the basis for this lies in the development of a "commercial code" for electronic and other information contracts, both within the United States and internationally.

Article 2B deals largely with transactions and subject matter that have never been directly covered by the U.C.C. Of the transactions covered, only software contracts have been considered within the U.C.C. Even for computer software, coverage under the U.C.C. is limited. But Article 2B is not just a software contract statute. The other subject matter for which licensing contracts are used are today governed not by the U.C.C. but by common law, federal property law, and some regulation. Part of the project involves accommodating the various legal traditions.

Yet, in the modern digital economy, these industries and subject matter are rapidly converging around the digital technology that dominates the information industry and, even, much of the goods sector. The lines of demarcation will, and already have, become less and less significant while businesses converge into a multi-faceted industry with common concerns.2Motion pictures, books and records are now often digital in content and provided through various digitally enabled systems, such as Internet access. Thus, for example, a recently successful motion picture ("Toy Story") was in effect a lengthy computer program, entirely digital in development and presentation. Various publishers, such as the New York Times, the Wall Street Journal, and West Publishing, provide their basic information resources on-line as well as in paper form. They do business in the same environment in which Oracle Software provides its commercial software products to end users.

That converged industry far exceeds in importance the goods manufacturing sector in our economy. Unlike manufacture of goods, the information industry is growing rapidly and commands large portions of the national economic product. The copyright industries and information transactions affected by Article 2B involve subject matter entirely unlike the traditional transactional framework which focuses on transactions in goods. In Article 2B transactions, the value of the subject matter lies in the intangibles, the information and associated rights to use that information.

This Article is being developed by consultation among many groups. When completed, Article 2B will provide a framework for contractual relationships among industries at the forefront of the information era and permeate the global economy. The test of the project lies in its ability to accommodate the parties involved and the practices that are driving this vital part of the economy. Evaluating the balance achieved hinges on one's perspective, yet, as the following indicates, the Draft distributes benefits among the various parties.

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

+ provides contract law roadmap for converging industries with differing traditions

+ confirms contract freedom in commercial transactions

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

+ establishes strong protection encouraging dissemination of published informational content

+ recognizes layered contract formation occurring over time

+ clarifies enforceability of standard forms in commercial deals

+ proposes solution for battle of forms

+ applies "material breach" concept corresponding to common law

+ sets standards relating to access and Internet contracts

+ establishes contract default rules 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 end user

+ 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

+ settles enforceability of mass market licenses subject to refusal term concept

+ creates method for contracting in Internet and similar contexts

+ excludes consequential damages for published informational content

+ establishes guidance on the meaning of license grants

+ establishes control and protections for licensors on transferability of a 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

+ confirms that exceeding a license as a breach of contract

+ establishes standard on connection of remedy and consequential damages limits

+ creates duty of reasonable care to avoid viruses in copies that cannot be waived in mass market

+ enables financing licensee interest in a non-exclusive license without licensor consent

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

+ gives licensee a right of quiet enjoyment

+ codifies that advertising can create an express warranty

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

+ creates implied system integration warranty

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

+ requires disclaimers of implied warranties be in a record (e.g., writing)

+ expressly recognizes implied licenses

+ creates broad scope presumptions

+ makes mass market licenses presumptively transferable

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

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

+ requires affirmative acts of assent to a record instead of mere passive retention

+ creates direct contract with remote publisher in mass market

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

+ enforces releases without consideration

+ enforces term providing that a license cannot be canceled

+ creates warranties and rights against retailer independent of publisher license

+ places substantial limitations on electronic self-help for consumers and businesses

+ presumes perpetual term in single payment software license

+ prohibits choices of forum that unfairly disadvantages a consumer

Modern Economy and Law Reform

The current UCC affects contract practice and law throughout the economy, but it was based primarily on transactions in "goods" and a financing structure that refers to that model. It reflects a 1950's economy. Then, clear distinctions between goods, intangibles and services in commercial relationships were clear and sharply differentiated. Sales of goods dominated then. They no longer do so. In addition, today, computerization blurs the models. "The distinction that used to be drawn between "goods" and "services" is meaningless, because so much of the value provided by the successful enterprise ... entails services [and information]." 3 Robert Reich, The Work of Nations 85-86 (1991).

The 1990's witnessed a shift in the source of value and value production in the economy. The service sector now dominates. 4 See Karl P. Sauvant, International Transactions in Services: The Politics of Transborder Data Flows (Westview Press 1986). The information industry exceeds most manufacturing sectors in size. The entertainment industry was the first post war international industry in the United States. The on-line industry is the most recent. The software industry, which provides the basic fuel for the information age, did not exist in the 1950's. Today, its products challenge traditional law in international trade, tax, intellectual property, and contract.

Contracts involving information are not equivalent to transactions in goods. 5 Many court decisions place software licensing in Article 2 even though software is licensed and not sold and even though the focus of the transaction from the standpoint of both parties centers not on the acquisition of tangible property, but on transfer of capability and rights intangibles. See Advent Systems Ltd v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991); RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737 (2d Cir. 1979); In re Amica, 135 Bankr. 534 (B.R. ND Ill. 1992). Cases excluding software and data processing from Article 2 include: Data Processing Services, Inc. v. LH Smith Oil Corp., 492 N.E.2d 1329, 1 UCC Rep. Serv.2d 29 (Ind. Ct. App. 1986) (software development); Micro-Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wis. Ct. App. 1988) (development contract). The contracts emphasize different issues and call into play a much different social policy structure concerning when and to what extent liability risk ought to be created and imposed against the provider of the subject matter of the contract.

Project History

Although it today involves participation by motion picture, publishing, banking, and online industries, Article 2B began with a focus on the contract issues associated with computer software licensing as many of those transactions were brought within the scope of Article 2, a statute dealing with sales of goods.

Under modern copyright law, software and most other digital products are governed by an intellectual property rights regime under which the copyright owner holds the exclusive right to authorize or make additional copies of the work, distribute the work in copies, engage in public display or performance of the work, and make modifications of the work (a so-called derivative works). This copyright regime (along with other intellectual property rights) creates property law much different from that associated with goods and places importance on the contractual terms relating to a grant conveyance or restriction of rights in the intangible subject matter. In this regard, software and other digital products are treated in law more like manuscripts and motion pictures, than television sets and cars. Even though a purchaser acquires a copy of the work, the producer retains rights and control with respect to various uses of the copy, including uses that make additional copies or alterations.

This underlying difference coupled with the ease of copying involved in modern digital products causes sharp differences in contracting practices. The differences are only enhanced with the development of the Internet and online services as an important feature of contemporary commerce since these systems allow for transfer of information without the intermediation of tangible objects. Indeed, in the modern marketplace for information, a major conflict looms between systems in which the end user has in its own machine the software and other information assets needs for its business as compared to systems that use rapid communications and Internet capabilities to enable that end user to seamlessly employ software and other information assets located hundreds or thousands of miles away in "cyberspace."

Over several years, committees of NCCUSL, the ABA and other groups examined the consequences of what appeared to many to be a mismatch in concept between contract law aimed at defining relationships relating to the sale of goods (article 2) and contract relationships in which information (or more generally, intangibles) were the centerpiece of the transaction and the contractual format most often involves a license, rather than a sale. The conclusion reached by these committees and by representatives of the information industries entails two basic observations:

1. Distinct From Sales. Information transactions and, especially, transactions involving licensing of digital information, differ substantively from transactions involving the sale or lease of goods. The differences are manifested in both the conditional nature of the transaction and that the value obtained or conveyed lies not in the tangible property, but in the information and rights that are severable from the tangibles. Indeed, it will continue to be increasingly the case that no tangible items are needed to convey information on-line or in electronic transactions. Because of the differences, a body of law tailored to transactions whose purpose is to pass title to tangible property can not be simply applied to transactions whose purpose was to convey rights in intangible property and information. A separate treatment of this commercially important class of transactions was needed.

2. Commercial Significance. The commercial importance, both currently and in the future, of the information industry is obvious. Software and related information technologies currently account for in excess of 6% of the gross national product and the size of the industry continues to grow. Adding in the other industries (publishing, motion pictures, on-line systems) swells the figure to a huge share of the economy The treatment of digital information, both in intellectual property law and in contract law, has become a major focus of contemporary debate. These industries and the transactions they engage in are major factors in the commercial landscape more than sufficient to justify coverage in a commercial code.

Deliberative Process

These conclusions were reached through a process of deliberation involving several committees of the National Conference of Commissioners on Uniform State Laws (NCCUSL), discussions in the context of the American Bar Association, and review by numerous other groups.

This project began at the recommendation of an ABA Study Committee that consideration be given to developing uniform law treatment of software contracts, either in or outside the UCC. A subsequent study committee of NCCUSL agreed and proposed a separate article of the UCC for software and related contracts. Shortly after that, however, the software industry objected. A second study committee was appointed. After extensive consultation and review, a Special Committee on Software Contracts was created to work parallel to the Drafting Committee on Article 2 Sales. This Special Committee was later folded into the Article 2 Committee.

The Article 2 Drafting Committee concluded that an appropriate approach would be to develop a "hub and spoke" configuration for Article 2 under which licensing and sales would be treated in separate chapters of revised Article 2, both chapters being subject to general contract law principles stated in the "hub" of the revised article.

During this period, information industry groups reversed their position in light of developments in the online and other areas, and the increasing gap between contracts dealing with this subject matter and contracts that deal with goods (either by lease or sale). They concluded that treatment of the contracts affecting their industries within the UCC was appropriate and desirable as a means of standardizing practice and providing a roadmap for the areas of contracting that are springing up in the modern information economy. The industry, however, advocated a separate UCC article on licensing because of their belief that the unique character of such transactions merited separate treatment and that such separation would make the process of moving forward.

In July, 1995, the Executive Committee of NCCUSL concluded that the appropriate approach for moving forward was to develop an article of the UCC dealing with licensing and other transactions involving information. This decision and the events that preceded it reflect an awakening to the fact that the modern economy and commerce within it no longer depends solely or primarily on sales of goods. Additionally, the decision involves a recognition of the fact that information and other license contracts entail far different commercial and practical considerations than can be addressed within a sale of goods model.

Working Drafts

From the outset, the Article 2B process has reached out for the widest range of input and commentary possible. To a greater extent than in any other recent UCC project, this has led to an active engagement of the views of many different groups and individuals. During the period of from March, 1994 through today, the Reporter and various members of the Committee have met with representatives or members of a wide range of groups to review provisions of various interim drafts. More than thirty organizations have had representatives at Drafting Committee meetings including:

ABA Business Law Section

ABA Section on Intellectual Property

ABA Section of Science and Technology

ABA Law Practice Management Section

American Film Marketing Association

American Intellectual Property Law Association

Association of American Publishers

American Electronics Association

Association of Scientific, Technical and Medical Publishers

Commercial Law League of America

Consumer Project on Technology

Consumers Union

CBEMA

Equipment Leasing Association

Federal Reserve System

ITAA

Information Industry Association

Licensing Executives Society

Information Technology Council

Interactive Digital Software Association

Software Publishers' Association

Business Software Alliance

Silicon Valley Software Industry Coalition

Society of Information Management

Motion Picture Association of America

California Bar Association

Association of the Bar of the City of New York

Chicago Bar Association

Texas State Bar Association

Recording Industry Association of America

Drafting Committee meetings are routinely attended by a large number of practicing lawyers not affiliated with associations and by representatives of various companies. Drafts of Article 2B have been discussed at over 150 seminars and public meetings; a large number of individual attorneys have provided written commentary on draft provisions.

A paradigmatic transaction involves a license, rather than a sale.

"License" means a contract that grants permission to access or use information if the contract expressly conditions, withholds, or limits the scope of the rights granted, grants only non-exclusive rights, or affirmatively grants less than all rights in the information, whether or not the contract transfers title to a copy of the information.6UCC 2B-102.

The transaction is characterized by 1) the conditional nature of the rights or privileges conveyed, and 2) the focus on information, rather than tangible property.

A license is not a lease or a sale. Both of those terms apply to transfers in goods, rather than rights in intangibles. The Supreme Court described a patent license as "a mere waiver of the right to sue."7General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 181 (1938) The Federal Circuit Court of Appeals stated:

[A] patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. . . . Even if couched in terms of "[L]icensee is given the right to make, use, or sell X," the agreement cannot convey that absolute right because not even the patentee of X is given that right. His right is merely one to exclude others from making, using or selling X. 8 Spindelfabrik Suessen-Schurr v. Schubert & Salzer, 829 F.2d 1075, 1081 (Fed.Cir.1987), cert. denied, 484 U.S. 1063 (1988). See also Cohen v. Paramount Pictures Corp., 845 F.2d 851 (9th Cir 1988).

These descriptions refer to a "pure license" in which the licensor does nothing more than simply grant the licensee a privilege to use patented technology or copyrighted expression without additional commitments or steps to make that use possible.

Many licenses regulate rights in intellectual property. There are many situations, however, in which a license occurs in the absence of intellectual property. A license also exists in situations in which one party receives permission to enter the physical premises or computer of another or where property owned by the licensor is made available to the licensee. 9 See Ticketron Ltd. Partnership v. Flip Side, Inc., No. 92 C 0911, 1993 WESTLAW 214164 (ND Ill. June 17, 1993); Soderholm v. Chicago Nat'l League Ball Club, 587 N.E.2d 517 (Ill. Ct. App. 1992).

That model exists in the digital world in reference to the many transactions in which parties are licensed to use computer or other information resources of a licensor. In this Draft, that model is encompassed in the concept of an "access contract" which, as to rights to access a facility, is treated in current law and this draft as generally analogous to is a more complete transfer of property rights. Section 2B-102 defines such contracts as:

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.

These are contracts for online access and services. The focus centers on licensed access to a resource or facility. This relationship creates a variety of ongoing obligations of the parties (e.g., the obligation to pay for access, the obligation to maintain accessibility) not present in other licenses.

Licenses are common commercial transactions. The key fact is that the value resides in the intangibles, rather than goods. One does not purchase a book to admire the paper (goods), but to use the information. One does not acquire software to enjoy the diskette, but to use the program, encyclopedia or other content.

Licensing is a dominant means of commerce in digital information and in commercial information transactions. In distributing information products, as with goods, several different transactional options exist, licensing is a primary option, especially in digital information industries. Typically, as a simple matter of contract law, license restrictions are enforceable even though their terms do not mirror the "exclusive rights" in copyright or patent law. Indeed, while many courts use Article 2 to resolve contract disputes relating to themes covered by that article, Article 2 has never been applied to determine the effectiveness of use restrictions. Courts consistently apply licensing law paradigms to issues involving software and online contracts where the issues involve enforcing restrictions on use of information.

Courts generally enforce contract terms unless a specific term in a particular context conflicts with federal antitrust or related doctrines of patent or copyright misuse. Thus, courts have enforced license restrictions precluding non-commercial use of a mass market digital database, limiting a right to access by barring the making of a copy of software, limiting use to a specific computer, limiting use to internal operations of the licensee, restricting redistribution to a particular grouping of software and hardware, precluding modification of a computer game, and various other contract limitations. In these and other cases, the license accompanied distribution or delivery of a copy that enabled the licensee to use the licensed information.

Article 2B does not change the balance between contract and federal law. It could not do so even if that were the intent. Article 2B does not create contract law here - contracts have long been used to control distributions. Article 2B merely provides a more coherent and workable basis for contract issues.

Commercial Practice

As in transactions in goods, licensing spans a wide range of commercial practices. Article 2B focuses on many of the most commercially important transactions in modern commerce.10As discussed below, the Draft excludes most trademark and patent licensing.

For purposes of illustration, it is useful to distinguish various types of licensing. One factor differentiates between licenses that relate to information physically transferred to a licensee, as contrasted to licenses that enable a licensee to access a location (i.e. a computer) in which information resides. The latter access contract is used widely in modern Internet and online transactions. What is licensed is a right to have access to an environment that the licensor owns or controls.

In transactions in which information is made available on diskette or otherwise to a licensee subject to licensed conditions, a variety of transactional formats exist. In some, a licensor deals directly with the end user. In others, a chain of distribution intervenes and the copyright owner does not deal directly with the end user. In each case, the basis of the license transaction resides in either the existence of intellectual property rights in the information or, more simply, the fact that the licensor has control over a source of the information that the licensee desires to utilize.

In areas covered by Article 2B, copyright law is a dominant source of intellectual property rights. It gives the copyright owner the exclusive right to make copies of its work, to distribute copies, to make derivative works, to publicly display or perform the work, and other rights. A basic commercial choice made by a copyright owner is whether to license or to sell a copy of its work. In book publishing and most records, in current practice in the mass market, copies are sold. In the motion picture industry, licensing is the common approach in reference to theaters who publicly perform the movies, while in the consumer market, copies are either sold or leased (with a license that precludes public performance) for a brief time. Software is typically licensed, although computer game distribution frequently involves sales of copies.

One method of distribution occurs when the copyright owner (or its agent) contracts directly with the licensee. This is common in markets involving software for large or complex computer systems and databases with significant commercial value and cost per use. It is also characteristic of licensing in the publishing and entertainment industries. In the software industry, direct licenses (commonly in standard form agreements) may transfer of a copy of the software to the licensee subject to express contractual restrictions on use. Increasingly, rather than on a disk, copies are moved to the licensee's site electronically. In the near future, an additional licensing format will involve not delivery of software, but licensed access to and use of elements of software for brief periods as needed. Even today, in many license relationships, data is transferred from the licensee to the licensor, who utilizes its own software and systems for processing, examining and otherwise handling the licensee's data.

Common, but not necessarily uniform contract terms limit use to a designated system, for specific purposes (e.g., internal use only), subject to confidentiality conditions, transferability limitations, and similar restrictions applicable to the commercial deal. A central element of this distribution method is to recognize that cases uniformly hold that loading software into a computer and, even, moving it automatically from one part of memory to another part, constitutes making a copy of the software that falls within the copyright owner's exclusive rights.

Direct licensing also involves many contractual relationships in which information (software, text, movies) is developed for the licensee. Here, it is common for smaller companies or individuals to be licensors with large corporate licensees. This, of course, illustrates an important point in the overall mix of rights and contract issues. While large software providers are important factors as licensors, the overall software industry consists of large numbers of small licensors. This is equally clear in entertainment and publishing venues.

As in other areas, commercial licensing also occurs in context of broader distribution and utilizes distribution chains. These are not analogous to distribution chains employed in the sale of goods marketplace because of the intangible subject matter and the overlay of intellectual property rights which include the exclusive right to distribute copies. While it greatly over-simplifies the matter, it is useful to discuss two distinct frameworks.

The first involves use of a master copy and is common in the movie industry and in software contracts. Under this framework, a "distributor" receives access to a single master copy of the information work and a license to make an distribute additional copies or to make and publicly perform a copy. For example, Correl Software may license a distributor to allow its software to be loaded into the distributor's computers or video games. The contract will contain a number of terms. Correl may limit the distributor to no more than 1,000 to be distributed only in the computers and only if subject to an end user license. Since both the making of copies and the distribution of copies are within the scope of the owner's copyright, acts that go outside the contractual limitations are infringements as well as contractual breaches.

An alternative methodology uses actual copies of the software. Here, for example, Quicken may license a distributor to distribute its accounting software in packages provided to the distributor by Quicken. A license is used in the software industry here, although some other industries may sell copies to the distributor for resale. In the license, the distributor may be allowed to distribute copies to retailers, provided that certain conditions are met, such as terms of payment, retention of the original packaging, and making the eventual end user distribution occur subject to an end user license. Since the distribution right is an exclusive right in copyright law, distributions outside the license infringe the copyright.

In both sequences, the information product eventually reaches an end user. If it does so in an ordinary chain of distribution complying with the distribution licenses, the end user is in rightful possession of a copy. If the distribution involved sales of copies, nothing more is required. The end user is the owner of the copy. Copyright law spells out limited rights that flow to the owner of the copy (e.g., to distribute it, make a back-up if it is software, make some changes essential to use if its software). There is no direct contractual relationship between the copyright owner and the "end user."

If, however, the copyright owner elected a licensing framework, given the structure of the transactions, the end user's right to "use" (e.g., copy) the software depends on the end user license. Typically, this is characterized as a license from the producer to the end user. It creates a direct contractual relationship that would not otherwise exist and which, in light of concepts of privity, might not be implied as between these parties. The contract, then, at this point, jumps past the chain of distribution and creates a direct link to the producer by the end user. It is also, in this sequence, the only contract that enables the end user to make copies of the software in its own machine.

Nature of a Commercial Statute

The fundamental philosophy of Article 2B centers on supporting contractual choice and commercial expansion in information contracting. In addition, an important theme has increasing force as the technology revolution in Internet and similar contexts expands. That theme involves a need to create and preserve as broad as possible a field for expression and communication, commercially and otherwise, of ideas, images, and facts; material that this draft refers to as "informational content."

Informational Content

On this latter theme, the convergence of technology and the evolution of the information age in which we work entails a fundamental shift in our society and in how people interact, trade and establish commercial relationships. Information content has become important commercially, but that importance doe not diminish its political or social role. As contract rules evolve, the basic themes of First Amendment and other policies to encourage vibrant discourse on important subjects or, even, unimportant topics, must continue to be central to how law approaches issues in this new era. Even if informational content has become a significant commercial commodity (which it has), we must not forget that information content and its communication in a marketplace of ideas remains equally relevant to political and social norms in this country. The idea of a commodity or a product, when applied to information, does not transform important elements of this culture into mere business assets. What we do here affects not only the commercialization of information, but also the social values its distribution has always had in this society.

The thought that information content becomes something entirely different if the provider or author distributes it commercially can hardly be a premise. Commercialization (that is controlling who receives the information or charging a fee for its receipt) is not inconsistent with the role of information in political, social and other venues of modern culture. If it were, newspapers, books, television, motion pictures, video games, and other modern sources of information content for the general public or for specialized groups could not exist. What we do in Article 2B in creating (or avoiding) liability risk, in allowing (or precluding) author's to control distribution of their ideas, or in allowing (or denying) the right to contract for licenses of information has a significant impact on the future of information in new and in older systems of distribution.

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

Freedom of Contract

The philosophy in UCC provisions on commercial law builds on two basic assumptions about commercial contract law. The first commercial law theme assumes that a role of contract law is to preserve freedom of contract. This permeates the UCC: "This article was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract. . . . . These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care." 11 UCC 2A-101, Comment.

The idea of contract flexibility is embedded in general contract law theory. The idea that parties are free to choose terms can be justified in a number of ways. 12 See Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 Va. L. Rev. 821 (1992); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 734 (1992). It leads to a preference for laws that provide background rules, playing a default or gap-filling function in a contract relationship. A default rule applies if the parties do not agree to the contrary. A default rule should mesh with expected or conventional practice in a manner that projects a favorable impact (as judged by relevant policy) on contracting and that can be varied by the contracting parties. This is in contrast with rules that dictate terms and regulate behavior. As a matter of practice, default rules are common in commercial contexts, while consumer law contains many fixed rules designed to protect the consumer against overreaching.

Default Rules

The second commercial law premise defines codification as a means to facilitate commercial practice. This is approached in this draft by an effort to identify existing patterns of commercial practice and to follow a presumption that the goal of the drafting is to identify, clarify and, where needed, validate existing patterns of contracting to the extent that these are not inconsistent with modern social policy. Grant Gilmore expressed this in the following terms:

The principal objects of draftsmen of general commercial legislation . . . are to be accurate and not to be original. Their intention is to assure that if a given transaction ... is initiated, it shall have a specified result; they attempt to state as a matter of law the conclusion which the business community apart from statute ... gives to the transaction in any case. But achievement of those modest goals is a task of considerable difficulty. 13 Grant Gilmore, On the Difficulties of Codifying Commercial Law, 57 Yale L. J. 1341 (1957).

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

How one decides what rules will best facilitate contracting practice is a matter of dispute in literature. In this context, the best source of substantive default rules lies not in a theoretical model, but in reference to commercial and trade practice. This is not simple faith in empirical sources for commercial law. It stems from the reality that, even though we may not know how law interacts with contract practice, decisions about contract law will continue to be made. In those decisions, we should refer for guidance to the accumulation of practical choices made in actual transactions. The goal is a congruence between legal premise and commercial practice so that transactions adopted by commercial parties achieve commercially intended results. 14 Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interaction Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261, 266 (1985). See also Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 Va. L. Rev. 821, 822 (1992) ("default rules [that reflect the conventional or common sense in the relevant community] are likely to reflect the tacit ... agreement of the parties and thereby facilitate the social functions of consent."). Background rules tied to the ordinary, but actual commercial context tend both to provide a legal base that falls within the tacit expectations of the parties and to ameliorate problems from lack of knowledge by supplying common sense outcomes.

Yet, in Article 2, Article 2A, and Article 2B, a wide range of transactions exist and a variety of diverse industries are affected. The transactions range from a casual deal between two individuals at a garage sale to transactions between sophisticated businesses employing multiple lawyers and affecting billions of dollars of business. The approach needed is not to draft rules that an individual party would draft tailored to each case, but to select an intermediate or ordinary framework whose contours are appropriate, but whose terms will be altered in the more sophisticated environments. A UCC Article designs default rules that are acceptable in ordinary transactions where they can be frequently used without disruption or costly negotiation.

Intellectual Property Overlay

Many, but by no means all of the information that provides the subject matter in commercial exchanges receives protection under federal intellectual property law. In most cases, patent and copyright law do not affect contract law; they coexist with it. Article 2B does not create contract law as an option in this field. For many years, owners of intellectual property have contracted for selective distribution of their property and placed limits on contracted-for use. Licensing law reflects this broad and long-standing contract practice and generally allows contract options, subject only to specific restrictions in federal property law, to antitrust-related restrictions on some contracts in some settings, and in some limited types of claims or contexts, to over-riding mandatory federal policies.

As stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to property rights created under copyright.15 17 U.S.C. 301.

But as both a practical and a conceptual matter, copyright (or patent) do not generally preclude or preempt contract law.16See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996);

Indeed, contracts are essential to use one's own property, even when the property is tangible, let alone when it is intangible. A contract defines rights between parties to the agreement, while a property right creates rights against all the world. They are not equivalent.

Important issues exist here. Federal intellectual property law, as well as other federal law and regulation, place some specific, existing, and recognized limits on contract. These include restrictions on transferability, recording requirements in some cases, a statute of frauds concept, and enforceability of property rights against good faith purchasers. A state law developed in context of these specific and existing rules cannot ignore them. While state commercial law themes might prefer a rule that a secured creditor can create and enforce a creditor's interest in a licensee's rights, federal law precludes any transfer of a licensee's rights in a non-exclusive license without the licensor's consent. A default rule that ignores this preemptive provision creates true traps for the unwary. In this draft, they are avoided insofar as possible, although in several situations, there are provisions that push against explicit federal rules insofar as reasonably possible.

This interaction of state law and specific federal yields default rules that, in some cases, do not correspond to the treatment of analogous issues in other parts of the UCC. This is true, for example, with respect to the transferability of a licensee's interest in a non-exclusive license. Federal law reflected in a series of cases holds that the licensee's interest is not transferable without the licensor's consent.17See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).

The rationale for this rule is discussed in relevant notes in this draft, but the principle, which contradicts some state law assumptions about transferability, is followed in the Draft. Similarly, in patent and copyright law, no concept of good faith purchase exists against a claim of infringement and this principle limits the ability of a party taking outside of the terms of a license to claim insulation from infringement and other property claims based on making or retaining unauthorized copies or uses.18See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994).

The Draft corresponds to this federal law approach. Also, copyright law precludes a transfer of ownership of copyright in the absence of a writing conveying ownership. In discussing development contracts, this Draft reflects that limitation, but attempts to ensure that the agreement of the parties is enforced to the extent possible within that federal law constraint.

These provisions reflect a policy of correspondence of rules in addition to simple recognition that federal law preempts contrary state law. There are other situations where federal law and policy shapes contract law and practice, but the nature of that role is less clear and typically more controversial. The Draft adopts a position of neutrality on such issues, leaving determinations about their content to be determined under federal law, the appropriate venue for such discussion.

This occurs primarily in respect to federal policies managing competition under antitrust and similar theories of intellectual property misuse and to the application of federal policy about the availability of publicly distributed information for fair use and public domain applications. Typically, in determining whether or when such policies apply, courts accept that contract law generally prevails, but ask whether a particular contract clause in a particular setting conflicts with federal policies when balanced against the general role of contracts in the economy and legal system. How far the federal policies reach remains in dispute. Not surprisingly, in light of the transformations and economic shifts yielded by digital information technology, defining the proper scope of rights as a matter of federal property law has been controversial; it remains unresolved despite extensive periods of negotiation and political discussion. Two disputed settings deal with reverse engineering of copyrighted, but unpatented technology and with the scope of educational or scientific fair use of digital works. The issues are questions of federal law and policy. They must be resolved by courts and Congress, rather than through state legislation. Article 2B takes no position on these policy questions, but merely provides a generic contract law framework to augment and bring to modern form the existing complex network of common law, code and general industry practice.

The fundamental theme entails a recognition of the differences in goods and information as subjects of commercial transactions. In the world of goods, the goal of the purchaser involves acquisition and use of specific, tangible property. That focus yields a number of transactional principles in article 2 and 2A and also shapes the nature of the remedies developed in those articles. It yields a focus on the manner and condition of delivery and, in the case of breach, on the disposition of the particular items or their replacement. In the world of goods, while many replications of a particular product are placed on a mass market, each product provides and constitutes the unit of exchange. In the world of information, that is no longer true. Many resulting principles and remedial provisions differ as a result.

In the world of information, the goal is to acquire the knowledge, technology, or other intangibles along with the right to use the intangibles. Unlike in goods, information cannot always be returned, nor need the same copy be transferred in order to establish the harm caused by breach. Thus, remedies differ from those for goods. Also, because of its intangible character, information can be transferred in many different ways: a telephone call, a electronic message, a delivery of a diskette. Article 2B seeks transfer method irrelevance. How a transfer occurs should not alter the applicability of the article or, in general, what substantive rules apply. Some information transactions involve remote access to a computer, while others occur by delivery of a diskette or a book. This does not place one transaction within the UCC, while the other is under common law. In some cases, the method of transfer and the market in which the transfer occurs affects what default rules apply, but this should only be true if the commercial practices are different or if there are substantive policy concerns that indicate a different result is proper.

Beyond this, important concepts emerge around 1) the scope of the Article; 2) the electronic contracting rules; 3) the concept of mass market licenses; 4) the treatment of standard forms; 5) the use of a substantial performance standard other than in mass market transactions; 6) the tailored warranties for programs and informational content; 7) the treatment of transferability; and 8) the handling of remedies.

Scope: Licenses and Information

In every context in which modern information technologies have 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 definition of Article 2B scope. The Draft reflects extensive discussion by the Committee and in other forums relating to how to best delineate the scope of the Article.

The basic questions involve first, what primary defining factors should be employed and second, what exclusions or inclusions should be adopted. The choices at the first level involve, largely, defining the subject matter (e.g., digital information or all information) and the type of transaction (e.g., license as contrasted to a sale).

The origins of the project lie in proposals about software transactions. Today, however, software is an ubiquitous element of information products. In a digital world, a focus on "software" transactions would be arbitrary and ineffective. The Draft focuses on transactions in "information."

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

The Committee rejected proposals to limit scope to digital information. Modern convergence of various information technologies makes reference to digital or a similar term an unworkable scope definition. One further rationale for this step lies in the desirability that the law not change based solely on the form in which information is distributed. Should, for example, there be a situation in which a factual database is distributed as a newspaper or distributed electronically? In both cases, the obligations and contract terms of the deal should be the same. Thus, bringing both into the same statutory mix enables the development of stable and consistent contract law rules. The consistent theme has been that the rules applicable to electronic information should be the same as the rules applicable to their printed counterparts.

The Committee opted to focus on licensing of information and software contracts. For transactions in information other than software, this allows a distinction between transactions involving a license and transactions involving the sale of a copy. This leaves undisturbed major segments of the traditional information industry that may not need treatment in a uniform law, 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 may be as explicit as the distinction between a sale and a lease in reference to goods. Except for the paper or other material used in the copies, law dealing with such information products arises under a body of common law tort and contract. The scope as to these products utilizes a transaction based characterization consistent with practices in those industries.

For computer software, the more important factor involves the nature of the product. Except for a few cases where no copyright protection exists, all transactions are subject to either express or implied limitations on the use, distribution, modification and copying of the software. These limitations are commercially important because the technology makes copying, modification and other uses easier to achieve in forms that can yield commercially harmful results. Bringing all transactions involving this subject matter into Article 2B reflects the functional and commercial similarity of the transactions and the need for a focused body of law applicable to these 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 regardless of whether a transaction constitutes a license or a sale of a copy (e.g., what limitations are appropriate on use of software to report information about the licensee's computer environment?).

Overlap Within the UCC

Obviously, many transactions entail mixed subject matter, including both information and goods (either sold or leased) Article 2B handles this overlap in two ways. The primary approach applies a variation of the gravamen of the action test. Article 2B covers aspects of a mixed transaction involving information, copies and documentation. Article 2 (or 2A) covers other goods in the same transaction. Which Article applies to a particular dispute depends on the focus of the dispute. No predominant purpose test is intended.

The second approach delegates full coverage to Article 2 in cases of embedded software (e.g., software used to operate the braking system of a car), thus leaving product liability and product quality issues in that context to that law. Defining the scope of this exclusion has been difficult.

Patent, Trademark and Services

The Draft contains a number of tailored exclusions, leaving various information and services contracts to common law coverage. Some of the exclusions have been widely accepted, but some have been controversial.

The exclusions deal with a variety of services and employment contracts. These include any employee relationship and services agreements related to entertainment (e.g., actor, musical group performance, producer, etc.). In the excluded cases, personal services contracts involve different default provisions than here. 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).

In each case, however, whether the work product of the individual entails the creations or modification of information, the essence of the contract deals with the personal labor of an individual or group. Especially as to employment contracts, a large body of existing law regulates the content and enforceability of the contracts in this services context. While the contracts have commercial significance, they are not commercial contracts and no good reason appears to include them within the UCC.

A more controversial exclusion deals with patent and trademark licenses. The desirability of this exclusion has been extensively debated by the Committee. The rationale for exclusion lies in the differences between 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 in the areas covered in this draft. The exclusion allows the draft to concentrate on a more focused area of commerce. In practice, however, one can anticipate that courts will apply aspects of this Article to other fields of licensing.

Electronic Contracts

Article 2B deals with electronic contracts. This area of contract practice is one that the White Paper referred in endorsing the value of this project for commercial practice in the information era.

The basic approach holds that contracts created using computers should be enforceable and that contract law principles establishing a stable basis for such contracts provides an important, facilitating services for developing commerce in this field. The provisions of Article 2B on these issues will provide a model for the other articles of the UCC and, eventually, a framework for national electronic commerce.

Formation Issues

Formation questions present mechanical as well as deeply philosophical issues about the treatment of electronics in contract law. At the most simple mechanical level, Article 2B uses of "record" (see 2B-102) in lieu of the traditional reference to "writing" as a reflection of the fact electronic recordation and transmission stands parallel to or more significant that writings in modern practice. This term is now standard UCC terminology. A 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.192B-102.

The term divorces concepts associated with writings from the traditional paper environment, making electronic records fully equivalent to paper records. The language here relates to language in the federal Copyright Act defining a "copy."

Article 2B also changes terminology in the idea of signature. The Draft replaces signature with "authentication." That term encompasses electronic actions to encrypt electronic records and is defined in a manner independent of concepts of a handwritten signature. The draft follows the emerging consensus that actions other than handwriting can suffice. The definition provides:

"Authenticate" means to sign or to execute or adopt a symbol, including a digital identifier, or encrypt a record in whole or in part with present intent to adopt, 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.20 2B-102(2).

This Draft does not follow modern "digital signature" statutes which confine legal impact to encryption technologies of a designated type. It is open-ended in terms of the technology, but does clarify that the impact accorded to a signature under prior law applies in the case of encryption techniques. The open standard is more appropriate for a general contract statute.

Under the Draft, if the parties agree to a commercially reasonable method of attributing a document to a party, compliance with that methodology per se gives the status of a signature.21 2B-110.

The idea of an "attribution procedure" is adapted from UCC Article 4A, security procedure. This parallels digital signature statutes in that, if the parties agree to use digital signature procedures, that choice is validated in the draft as conclusively constituting a signature. The requirement that the procedure be commercially reasonable allows a court an opportunity to consider the nature of the system adopted in any cases where the accuracy of the attribution is contested.

A more significant proposal deals with an "electronic agent." This concept refers to a computer program or similar automated device established to act on behalf of a party. While not an "agent" in traditional senses, the use of programmed surrogates to make contracts, find information, and otherwise interact with computers of other parties is increasingly important in electronic commerce and will be even more so in the future with respect to information assets where no specific need ever exists for a human being handling the transaction or its result in a digital world.22 2B-102.

Article 2B deals with the fact that electronic contracts, driven by computer capabilities, will increasing involve arrangements entered into and performed without there being any necessity for human intervention or decision making on both ends of the transaction. This yields a number of questions about offer and acceptance, notice and the like. Article 2B adopts the view that electronic contracts can be formed without human choices being made to offer and accept a particular transaction and that notice can occur without a human review of the subject matter. If a party creates a situation in which an electronic agent is to act on its behalf, then that party is bound by the actions of the "agent."23 In Article 2B, this is a question of "attribution." 2B-111.

An aspect of this concept is that contracts can be formed by the interaction of such agents with or without the active involvement of an individual representing the contracting party.24 2B-203.

In an electronic world of information- based transactions, human review of particular transactions and reaction to that review will often be displaced by electronic review within preprogrammed parameters with programmed or "learned" responses. These provisions, and other similar sections, are aimed at identifying and validating these commercial practices under appropriate standards.

There are risks of fraud and error, of course. Article 2B deals with these through a concept of "attribution." The idea that a computer can act on behalf of a party assumes that it serves as an electronic agent, selected, created or otherwise made available by the party for that purpose. More generally, attribution implies that a party will be charged with responsibility for a particular message or performance rendered electronically. There are three methods of attribution: actual involvement of either the person or its electronic agent, compliance with an attribution procedure, and lack of reasonable care resulting in loss to the other party. These concepts parallel international developments relating to the more closed-end use of Electronic Data interchange. They balance between a number of potential, other regimes for allocating loss or risk in electronic deals.

Mass Market Definition and Use

This Article creates the idea of a "mass market" contract that achieves a shift away from traditional patterns in the UCC which focus on "consumers." The term moves to a retail marketplace definition in which consumers and some businesses are treated under the same protective law. This extends some protections typically reserved for consumer to a business licensee and brings in various marketplace assumptions about transferability and the like that may be pertinent to mass market environments.

The "mass market" paradigm in Article 2B creates a number of important policy issues. The issues entail distinguishing "mass market" and "consumer" transactions. While the one incorporates the other (e.g., consumer transactions occur in the mass market), the idea of a mass market transaction goes far beyond the idea of a consumer transaction. Indeed, with respect to transactions that fall within this concept, a significant percentage if not a majority of licensees will be businesses, rather than consumers (e.g., commercial grade word processing; network operating software, database products, project management software). Some of these will be small businesses, but under current licensing practice, many of the licensees will be large business entities, larger than the licensor from whom they are "protected."

Definition.

The definition of mass market has been elusive.

Part of the difficulty lies in the fact that, while many have an intuitive understanding of what constitutes a mass market transaction, the concept has not been used in any other statutory provision. Most contract statutes focus on the consumer-commercial dichotomy. Some consumer protection rules broader the idea of "consumer" to include some business purchasers, but typically do so in terms of dollar amount limitations. Federal law provides mostly a focus on consumers, but in the Magnuson Moss Act uses a concept of "consumer product" which focuses on the general or most common purchaser of a product and then applies the federal regulations to the product, regardless of whether the specific purchaser was or was not a consumer.

As these concepts indicate, one way to conceptualize the "mass market" involves identifying a marketplace in which most participants are consumers in the traditional sense. Thus, for example, transactions made in general retail store environments are typically mass market transactions and also very often characterized by predominantly consumer transactions. On the other hand, purchases from wholesale distributors are often not equivalent to a mass market. Additionally, a characteristic of a mass market is that the party acquiring the relevant material is typically the end user, rather than a person acquiring for redistribution.

As drafted, the idea of a mass market centers on small transactions directed to the general public in a retail marketplace. In light of the risk allocation issues involved and new nature of the undertaking, the goal is to focus on relatively small transactions. This Draft incorporates most consumer transactions within the ambit of mass market. For non-consumer transactions (e.g., transactions between two businesses in a retail market), the definition utilizes a combination of a retail, general public reference point and a monetary cap to achieve the intended focus. The monetary cap does not limit consumer inclusion in the concept.

Applications

The issue with reference to the idea of a mass market in this Article goes beyond the definition and deals with how the concept is applied. The two uses of the concept: 1) treat the marketplace as a surrogate for consumer protection, thereby extending consumer protections to business transactions, or 2) use the concept a marketplace identifier which allows definition of various expectations about the nature of transactions in that market.

In contract law statutes, the idea of a "consumer transaction" has traditionally been associated with a theme of protection and enhanced notice requirements justified largely by the assumption that many consumers will be unsophisticated and lacking in economic power to negotiated terms or seek alternative sources of supply. That term and that tradition are present in various articles of the UCC. Clearly, in Article 2B, use of a reference to a consumer transaction should signal similar concerns.

The idea of a mass market transaction, on the other hand, could better be viewed as identifying a marketplace in which particular assumptions might be made about the nature of the transaction and the expectations of the parties. Thus, a mass market is typically an anonymous market and one in which the purchaser-licensee anticipates being able to retransfer its purchase and to use it in ordinary ways in its own machines. It is a market in which multiple copies of identical information or products are transferred to multiple purchasers without customization, making it possible to ask questions about what are the characteristics, for example, of an ordinary database system or word processing system. One view, quite simply, is that there term mass market is appropriately used when the article identifies a particular marketplace assumption, rather than a rule of purchaser protection in the classic consumer sense.

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 presumably lack the expertise to understand contract issues (e.g., consumer) and cases where the goal is to identify and define a marketplace by reflecting presumed assumptions applicable in that marketplace. The Committee opted to apply the concept of "mass market" as the theme in all but a few sections in which the issue arises.

"CONSUMER" APPLICATIONS:

2B-108 (choice of law): default rule

2B-109 (choice of forum): contract choice limited

2B-117 (electronic error): proposed consumer defense

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

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

"Mass Market" Applications:

2B-106 (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-208 (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

Relationship to Existing Consumer Law

Although the idea of "mass market" goes past traditional concepts of consumer protection, the combined effect of using that term and covering some transactions involving consumers specifically produces a draft that, in general, retains all existing UCC consumer protections and in fact creates some protections that are not present under current law.

For mass market transactions, the Draft retains the idea of perfect tender, important for consumer transactions as a means of allowing a simple remedy for products that do not meet standards. In addition, the Draft retains the implied warranty of merchantability in the mass market, applicable to consumers and businesses purchasing in that marketplace. As under current law, the warranty can be disclaimed, but Article 2B goes beyond existing UCC law to require that the disclaimer be in writing (a record) and by requiring a plain language disclaimer that gives the consumer more notice of what its rights are.

There are several situations in which the Draft creates rights beyond current Article 2. One involves so-called electronic viruses in the mass market setting. The Draft creates obligations to exclude viruses and make disclaimer of that obligation in the mass market more difficult than disclaimer of general warranties.

More importantly, as discussed below, the Article allows a consumer to object to terms of a mass market license based on arguments that the term would have caused a refusal of the licensee had it been brought to the licensee's attention. This incorporates ideas from the Restatement, but brings them to a general commercial marketplace where they have generally not been previously accepted. This rule covers both consumers and businesses who acquire information in the mass market.

A chart summarizing consumer-related issues in Article 2B as compared to current law is attached at the end of the Preface.

Standard Forms and Manifested Assent

In Article 2B makes a direct effort to deal with standard form contracts. The basic principle lies in the fact that in commercial agreements, standard form use is widely and broadly acceptable. It provides a number of economies in transaction costs and, quite simply, provides a strongly supported commercial practice. Article 2B adopts the position that standard forms used to document an agreement are enforceable so long as the party being charged with the terms of the form manifested its assent to the form.25 2B-307. No other position would be workable in modern commercial practice.

The Restatement (Second) of Contracts 211 generally supports enforcing standard forms except as to terms that fit the following:

Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

Restatement (Second) of Contracts 211 (3). The Restatement emphasizes whether, as viewed from the vantage of the provider of the form, the terms are such as would cause a refusal by the other party if brought to that party's attention. For that to occur, of course, the terms must not only be surprising, but also highly adverse to the deal. Only a small minority of states have adopted the Restatement test on this issue, but many states have rules that provide for closer scrutiny of standard forms in contracts of adhesion, especially consumer contracts.

The UNIDROIT Principles of International Commercial Contracts, reflecting a similar background, deals with standard terms (not forms) and invalidates terms that the "party could not reasonably have expected." For such terms, there must be specific agreement to the term. UNIDROIT art. 2.20. Unlike the Restatement, this emphasis is on the reasonable expectations of the assenting party and creates, one suspects, an impossible burden for a licensor who must structure its forms to fit diverse transactions and diverse contexts, especially in the mass market. This approach is particularly suspect because it centers on terms that are standard, rather than terms in standard forms. The UNIDROIT standard has not been adopted in any country, or any state of this country.

Article 2B approaches the standard form issue in a bifurcated fashion that conforms to the general idea that contractual choices are enforceable in the absence of unusual factors, especially in commercial deals. Article 2B buttresses this presumption with rules that are designed to ensure that, even in a purely commercial deal, the party adopting the form has an opportunity to review the terms and to accept or to reject them without penalty. These protections are embedded in the ideas of manifesting assent and opportunity to review described in 2B- 112 and 113.

A party can "manifest assent" to a form or a term only if they previously had an opportunity to review it and its terms. No assent to unknowable terms is effective. Beyond that, a party who had an opportunity to review the record and any specific terms for which assent is required, manifests assent if it engages in affirmative conduct that the record conspicuously provides will constitute acceptance of the record or of the particular term. Merely retaining the information or the record without objection is not a manifestation of assent. Also, a party's conduct does not manifest assent unless the record was called to the party's attention by before the party acts. In cases where the form is available only after the original agreement and during the period of initial use, manifestation of assent cannot occur unless, if it declines the agreement, the licensee can obtain a refund of any fees paid.

In a mass market, the transaction is anonymous and for often not fully considered by the transferee. In mass market transactions, Article 2B applies the concepts of manifesting assent and opportunity and goes further to invalidate some terms, even if there was an opportunity to review the overall form, unless there was assent to the particular term.

In invalidating refusal terms, Article 2B adapts the Restatement test. The basic theme is that, if the licensor should know that a term is surprising and would cause refusal of the license if the licensee knew of the term, that term is not enforceable unless the licensee expressly manifests assent to the term itself. This rule accommodates concepts about adhesion contracts, unfair surprise and the like. It protects against unfair surprise in a mass market transaction, but enables use of a contract in that setting. Manifestly, parties in the mass market enter into contracts. The issue is what are the appropriate terms of the contract. This approach places procedural protections on the creation of terms and allows a court to exclude unfair terms, but generally accepts that a party (even in the mass market) who assents to a form is bound by that form.

Informational Content.

Article 2B deals with a large number of informational content transactions that are not transactions involving computer programs per se. In dealing with contracts pertaining to information content, however, choices must be made about the applicability of Article 2 sale of goods concepts. In many respects, these concepts do not comfortably fit practices and relevant interests involved in handling contracts about informational content.

Transactional Aspects

This Draft contains two sections dealing with informational content transactions in terms of the transactional processes. One deals with the application of Article 2 concepts of tender, rejection and revocation to information industries. Unlike general rules in common law and the Restatement, the Article 2 model contains an 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 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 and until there is an express indication of acceptance (or rejection) by the licensee. This corresponds to commercial practice in this context.

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.

Liability Issues.

This Draft creates a concept of "published informational content" and relies on First Amendment and related policies to avoid the creation of expansive liability risk under contract law for distributions of information to the public. The issue here involves drawing a balance that allows for the continued, vibrant dissemination of content for use by people in an open society.

Published informational content is exempted from any implied warranty under 2B-404. This is critical insulation for such information providers and also corresponds to what rules exist under current law, such as in the Restatement (Second) of Torts 552 as applied by the courts. The Draft also proposes an exclusion of third party product liability claims with reference to published information under Section 2B-409. This brings the Article into correspondence with the Restatement and with better reasoned cases. Liability for information content is generally restricted to special relationships of reliance.

Section 2B-402 on express warranties leaves current law in place without change for published content. It declines to transport Article 2 express warranty rules into this environment, allowing courts to continue to work out under what conditions a content provider should be held liable for alleged breach of contractual representations.

Warranties and Performance Obligations

Article 2B blends previously disparate areas of contract that have a different mix of policy considerations and commercial practice with respect to implied assurances of quality in performance.

Transactions governed as sales of goods historically carried an implied warranty of merchantability that focuses on the quality of the product received, but can be and is routinely disclaimed. The warranty sets out the premise that the product conforms to ordinary expectations for products of similar type.

Different traditions exist in transactions outside Article 2. Under current law, many of the contracts covered in Article 2B would be services (or information) contracts. In many states, these contracts carry no implied warranty. In other states, and under Restatement law, an implied obligation or warranty exists, but does not guaranty an accurate result. It entails an assurance of workmanlike or reasonably careful effort. In transactions in information, tort and contract law implied obligations, when they exist, typically hinge on assurances that no false information is provided as a result of a failure by the provider to exercise reasonable care in a context where the provider supplies information for the business guidance of a particular client. Restatement (Second) of Torts 552. Case law typically limits this concept to relationships such as consulting contracts, accountant audits, professional client services, and the like; in the vast majority of reported cases, the obligations do not apply to information products distributed outside such relationship and in a form not tailored to a particular client (e.g., newspaper distribution, books). That decisional pattern reflect fundamental and long-standing policy. Contracts involving information content are infused with First Amendment and related concerns about not impeding the free flow and production of information.

To reflect the different traditions and the subject matter addressed in Article 2B, several tailored warranty rules are developed.

Computer Programs

Article 2B sets out an implied warranty of merchantability with respect to computer programs distributed in the mass market, applying a standard of substantial conformance to documentation for programs not distributed in the mass market.

The merchantability standard follows existing Article 2. It compares the particular program to programs of similar kind and asks whether the program meets ordinary standards for its description. As in Article 2, the warranty can be disclaimed in Article 2B. In current practice, few cases arise in which disclaimer does not occur. There are almost no reported cases on the meaning of merchantability in computer software.

For computer programs not in the mass market, there is an implied warranty that the program substantially conforms to its documentation. This corresponds to the most common negotiated warranty in commercial licensing. It differs from the merchantability warranty in its focus. The warranty focuses on the program's documentation itself for the implied obligation, rather than seeking to discern "ordinary" characteristics in "similar" programs outside the mass market as would be required by a merchantability concept. Besides creating a parallel with modern commercial practice, this warranty reflects the fact that outside of the mass market a wide diversity exists in program capabilities and characteristics, even within the same generic type of software. Non-mass-market programs of similar type differ widely in attributes, speed, capacity, and other traits that make comparisons across categories of software uninformative. An "ordinary" data compression program may not exist in this market.

Informational Content.

Article 2B-404 provides an alternative warranty structure relating to the aesthetics and factual accuracy of information content. In a given case, however, both computer program and information content warranties might apply because an information service provides content selected or sorted through use of a computer program.

Information content refers to factual data, images, sounds and the like, intended in the ordinary course to communicate to human beings. (2B-102) This is information in the classic sense of what one reads in the newspaper, sees on television, or obtains by reference to an encyclopedia. This Draft proposes a new term: "published information content" to identify content distributed on an general, non-tailored basis outside any special relationship.

No implied warranty exists in Article 2B about the aesthetic merit or marketability of information content. These are matters of taste and judgment, not of warranty, unless the parties seek and receive express commitments.

Implied warranties relating to the accuracy of factual information are created with respect to information distributed to a client in a special relationship of reliance or in a situation where the author or publisher tailors the information content to the particular contract. In cases where the warranty exists, there is no absolute assurance of accuracy, but a commitment that no inaccuracies are created by the provider's failure to exercise reasonable care. These provisions parallel existing law under contract and tort theory. They neither expand, nor restrict liability risk for the information provider except to the extent that the current draft applies this obligation in cases of non-business information, unlike the Restatement.

Viruses and Damaging Code

Digital products and on-line services create various risks relating to inadvertent (or intentional) introduction of computer viruses into the system of another party to an electronic transaction. The risk runs in both directions. A licensor may introduce viruses into its system or a licensee may inject a virus into a licensor's system. In fact, most virus issues arise in on-line systems or on-line access as compared to distributed software products on diskette.

No current case law provides guidance on how to allocate risk for viruses in a contractual context. No cases have arisen under Article 2. Under criminal law in many states, a party has liability for knowingly (not negligently) introducing harmful code or viruses into a computer system of another person. The cases under these statutes make it clear that this does not entail liability without fault, but focuses on intentional and knowing conduct.

Because the issues runs in both directions, an issue arises about whether to treat questions about virus obligations as a warranty, or as a contractual obligation.

Disclaimers of Implied Warranties.

UCC law allows parties to disclaim warranties. Article 2B follows that tradition.

As to merchantability, in mass market transactions, Article 2B requires a conspicuous disclaimer in a record. It indicates that a disclaimer complying with the terms of Article 2B is not unconscionable. This codifies current law in the majority of jurisdictions under the UCC. Where disclaimer language is invalidated despite compliance with conspicuousness rules in the UCC, this typically occurs because of specific consumer protection laws in a given state. Those laws on this point are not altered by Article 2B.

Article 2B continues current law to allow enforcement of "as is" language in non-mass-market transactions. In mass market transactions, it requires the following language or its equivalent: "The information [or computer program] is being provided as is or with all faults and the entire risk as to satisfactory quality, performance, accuracy, and effort is with the user." To be effective, this language must be conspicuous. This plain language approach makes disclaimers more informative.

Article 2B allows disclaimer of infringement warranties. Under current Article 2, the warranty can be disclaimed by "specific language" or by circumstances that give the buyer reason to know that the vendor is transferring only the rights it has. Current Article 2A uses the same approach.

Transferability and Financing

Article 2B deals with transferability, financing and related issues concerning licensed information. It does so in context of an important group of restraints present in modern federal law relating to intellectual property rights.

Federal policy and case law restricts the transferability of contractual and other rights in intellectual property, a core of the information assets considered in Article 2B. A consistent line of federal court decisions holds that, as a matter of federal policy, a licensee's rights under a non-exclusive license of a copyright or patent cannot be transferred without the consent of the licensor. This was confirmed by the Ninth Circuit in a holding that a patent license did not become part of the bankruptcy estate of a licensee. The explanation for this rule can be stated in terms of the limited nature of a license. It is also an outgrowth of federal policy allowing a licensor to control to which licensee's its intellectual property rights are conveyed:

Allowing free assignability would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee. In essence, every licensee would become a potential competitor with the licensor-patent holder in the market for licenses under the patents. And while the patent holder could presumably control the absolute number of licenses in existence under a free-assignability regime, it would lose the very important ability to control the identity of its licensees. Thus, any license a patent holder granted - even to the smallest firm in the product market most remote from its own - would be fraught with the danger that the licensee would assign it to the patent holder's most serious competitor, a party whom the patent holder itself might be absolutely unwilling to license.26Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).

The issue reflects the fact that licensed information that is again transferred is not second hand property, but identical to the original. This is true not only in reference to the pure licenses, but also in licensing rights in digital information.

Copyright and patent law also have long held that acts that infringe rights under those statutory property regimes are actionable, even if done in good faith. Copying infringes even if the copyist is not aware of the underlying right. Copying (or other action in violation of the exclusive rights, such as distribution of copies) that goes beyond a license is infringement unless protected by fair use or similar doctrines. These rules shape the available range of good faith purchaser rules in this Article.27See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D.N.Y. 1994).

A basic principle is that state law rules should not create a misleading impression by contradicting partially preemptive federal law. This shapes Part 5 on transfers and how financing can be accommodated. In both settings, the Draft contains suggested provisions that push close to limits. They accommodate financing by allowing creation and enforcement against the licensee, but not sale or control as against the licensor without consent of the licensor. (See 2B-504) Article 2A, not faced with the over-riding gloss of federal intellectual property policy, recognized a similar right of an owner to control its property, noting that the "lessor is entitled to protect its residual interest in the goods by prohibiting anyone other that the lessee from possessing or using them." Article 2A-303, Comment 3.

This Draft allows creation of a financing interest in a licensee's interests, but limits enforcement without consent of the licensor. Resale is excluded because of support for the licensor's intellectual property rights. The Draft also proposes an integrated concept of "financier" which includes both a security interest and a financing lease. It does not include unsecured interests. The concept, defined in Section 2B-102, is applied in the two sections on financing. The first is 2B-504. The second, 2B-618, contains a limited discussion of the relative relationship between a licensor, a financier, and a licensee (debtor).

Remedies

Remedies under Article 2B reflect the transient, intangible nature of the subject matter. They do not presume, as does Article 2, the focus of the transaction is on handling tangible, identifiable goods. Rather , in an intangibles transaction, the transferor's remedies reflect the fact that in principle an infinite number of transfers of rights can be made from the same copyright or patented software. The remedies of the licensee likewise do not focus on its handling of tangible material, but on any effects of the breach of contract on the licensee's general business or other operations.

The damages formulae give either party a right to recover for consequential damages. An earlier Draft of Article 2B proposed adoption of what was thought to be the more common commercial approach: that consequential damages are routinely disclaimed in commercial contracts. That experiment has been abandoned. The new rule reflects common law. The Restatement uses a licensing illustration in describing its general damages approach:

"A" contracts to publish a novel that "B" has written. "A" repudiates the contract and B is unable to get his novel published elsewhere. Subject to the limitations stated [elsewhere], B's damages include the loss of royalties that he would have received had the novel been published together with the value to him of the resulting enhancement of his reputation. 28 Restatement (Second) of Contracts 347, illustration 1.

For both licensees and licensors, the remedies provisions allow contract flexibility to define remedies, but absent agreement, they draw two distinctions: (1) a distinction between material and non-material breach, and (2) a distinction between default as to particular events or performance in a contract and default as to the entire contract. Faced with a breach by the other party to the contract, the injured party has an array of options, including continuing to perform the contract but seeking or reserving the right to redress for the particular breach. Materiality can be defined in the contract and a contract definition is definitive.

In digital information, the technology enables automated enforcement techniques that are not available in other contexts. The automation allows a provider of digital information to limit its uses consistent with a contract and, when that permitted use expires, to cancel the capability to use the material in the future.

This Article deals with electronic controls in three different respects. In each, the theme is that the licensor's contractual interest sustains appropriate controls, but that the licensee's interests requires protection in the form of notice, contractual assent in some cases, and an clear reason to act in others. The basic model allows electronic remedies subject to significant restraints.

Section 2B-314 deals with electronic monitoring devices, such as programmed limits on the number of users, number of uses or the like. It enables passive monitoring and restriction. That is, restrictions that simply prevent extra-contractual activity, but do not otherwise alter the information. Beyond that, such devices are generally allowed only if notice is given and their use is assented to.

The more controversial restriction deals with cases of breach. A licensor retains an interest in the intangible subject matter of the transaction. This interest is different from that of a lessor because is applies to an intangible rather than goods. In 2B-716, in cases involving a license (as contrasted to an unrestricted transfer of information), the licensor's remedies include a form of repossession or, at least, taking steps to preclude further use of the information by the licensee. This right is sharply circumscribed. It does not exist in cases where the information was so commingled that it cannot reasonably be extracted from the other information assets of the licensee. There are also limits couched in terms of damage to the property of the licensee. The right to prevent further use will generally be exercised only through court action. Self-help, such as through the use of electronic methods to disable software can occur only in very limited cases.

To use a remedy based on an electronic device enabling disablement of the software or other digital information asset, a licensor must have authorization to do so in the contract and must be acting on a breach that is material independent of contract terms defining materiality. That is, the remedy only exists for important (material) breaches.

Self-help here contrasts to the far broader provisions in Article 9. A secured party can exercise a right of self help so long as the exercise of that right does not result in a breach of the peace. Material breach is not required and there are no limitations on possible damage to property; it allows repossession of "equipment" by disabling it. Article 2A remedies are similarly broad.