Draft Article 2B of the Uniform Commercial Code (UCC) provides a template for modern commercial contracting involving information and related intellectual property rights. It contemplates a new article of the UCC dealing with licenses of information and software contracts. Part 1 of this memorandum provides background on the project. Part 2 describes several issues that merit special attention.

    As in any uniform law project, some issues in Article 2B merit special attention. These include: (1) scope of the Article, (2) treatment of "mass market" transactions, (3) exclusion of consequential damages, (4) qualitative performance standards, and (5) electronic self-help repossession.

Scope of Article 2B

    Article 2B scope has been the subject of debate. The scope issues reflect the dynamic nature of modern information industries and the convergence of previously distinct areas of commerce. That same convergence impacted telecommunications and other areas of law.

    The scope (§ 2B-103) reflects four Drafting Committee votes at the April, 1996 meeting. Subject to exclusions, Article 2B covers "licenses of information and software contracts." "Information" includes "data, text, images, sounds, computer programs, databases, and the like, and any intellectual property rights associated with the data, text, images, sounds, computer programs, software, databases, and the like, and any associated intellectual property rights." (§ 2B-102(18))

    (1) Digital Information. The Committee considered and rejected a proposal to limit Article 2B to transactions in digital information.

    Arguments favoring that restriction emphasized that digital products reflect the original focus of the project and the field of commerce most in need of clarification. Ultimately, however, most observers and a majority of the Drafting Committee concluded that a restriction based on a particular technology could not be appropriate. Technological evolution will quickly make any such distinction arbitrary and unworkable. Also, representatives of several industries argued that no distinction in contract rules should be made based on the method of deliver y or access.

    (2) Licenses of Information. The Committee considered and eventually adopted the view that Article 2B should be limited to transactions involving licenses of information and software contracts.

    The argument against this limitation focuses on the view that the subject matter of the transaction is the better demarcation point rather than the type of transaction. Thus, the critical fact lies in the fact that information, rather than goods is the main focus of the deal. Whether the transaction was a sale or a license, questions about liability, performance quality, method of transfer and the like should be driven by basically the same set of commercial and legal principles.

    The Drafting Committee concluded that a more controllable scope provided a better framework. In many information industries, licensing is the primary contract framework. A license, as defined in Article 2B and in practice, involves a conditional transfer in which the contract or underlying intellectual property law rules impose conditions or limitations on the licensee's use of the information or copies of the information. The conditional nature of the transaction provides a paradigm for developing a view of commercial law. If information or access to information is simply sold or released to another person (as in the purchase of a newspaper), an entirely different transaction occurs. In the case of computer software contracts, however, the difference between express and implied limitations narrows because of the media, how rights under current law are connected to use by the transferee, and commercial practice. This indicated that all software contracts should be within the Article.

    (3) Patent Licenses. The Committee adopted a proposal that the Article exclude patent licensing not related to software and similar contracts.

    The basic argument against this exclusion proposes that Article 2B provides a venue in which all forms of intellectual property licenses can be brought together and fostered under uniform contract principles. In this respect, exclusion of patent licenses serves no purpose. In contrast, the majority of the Committee was persuaded by the principle that patent licensing in biotechnology, chemicals, and other fields was sufficiently different from other licensing venues to justify different treatment.

Mass Market Transactions

    Unlike current Article 2, proposed Article 2B deals with standard form contracts, but does not separately treat consumer transactions. Instead, it distinguishes between commercial contracts and mass market contracts. In Article 2B, transactions that involve widely marketed items of limited value are accorded special protection described below irrespective of whether they are consumer or business transactions.

    Standard forms, of course, are routine and essential parts of virtually all areas of modern commercial contracting. Significant disputes exist in academic literature about the proper approach to enforceability of forms. The Restatement and some courts have adopted a limiting approach that, in the interests of preventing unfair surprise, allows a court to not enforce a clause based on a concept that the clause was outside the expectations of the party responding to the form.

    Article 2B treats standard forms as fully enforceable in commercial contracts if the party presented with the form manifests assent after having had an opportunity to review it. (§2B-307) This parallels the decision in the Article 2 Drafting Committee. (§ 2-206(a)) It validates commercial practice and ordinary expectations in cases where the parties are business entities. The terms "manifesting assent" (§ 2B-113) and "opportunity to review" (§ 2B-114) are defined and tailored to protect against surprise and over-reaching. They require an affirmative act indicating assent and real opportunity to review, even though it is not required that the business entity actually read or negotiate the standard terms.

    The desirability of protecting commercial expectations is somewhat lessened and elements of surprise are more pertinent. Article 2B defines "mass market" contracts. (§ 2B- 102(26)) This term includes consumer contracts, and also any other transaction in the mass market involving a standard form. Thus, for example, the term includes an on-line license of a database available for the public whether the licensee is a consumer, a small or a large business. The definition of a mass market contract has not been fully considered by the Drafting Committee, but the concept flows throughout the article. We deal with mass market transactions, rather than consumer transactions because, in information transfers, the traditional consumer- commercial distinction is not a clear point of delineation.

    For mass market contracts, surprising terms are not part of the contract unless the licensee manifests assent to the term after it is called to the licensee's attention. (§ 2B-308) How one identifies what are surprising terms in the anonymous mass market has been discussed. The draft focuses on terms that are not customary in the industry and that a reasonable licensor should know would cause most licensee's to reject the transaction if the term were called to their attention. Article 2 deals with consumer forms in a different manner.

    The concept of mass market contracts, blending both business and consumer transactions, is important in other contexts. For example, in a mass market license, the license is presumed to be transferable and the license term perpetual; both presumptions differ from other types of licenses. Similarly, mass market software transactions entail an implied warranty of merchantability, while other software contracts entail a different implied warranty. Overall, mass market licenses are more like a sale than are other transactions involved here, even though the contract restrict use.

Consequential Damages

    The Draft proposes that the default rule in information licensing should be that no consequential damages are allowed for either party unless they expressly assent to a contract term making such damages allowable. The Committee anticipates it will review for situations in which a contrary rule is important and make appropriate exceptions.

    Presumptions about consequential damages have been controversial in both Article 2 and Article 2B. A general argument favoring the rule proposed by Article 2B is that, in most commercial contracts in which the issue is discussed, consequential damages are disclaimed. In most situations, this reflects the commercial reality that consequential damages entail uncertain risk which each party has an interest in avoiding. Adopting the proposed Article 2B rule is consistent with our overall approach to default rules: adopt principles that reflect modern commercial practice and cause results that commercial parties would expect, rather than results that are surprising.

    The arguments against the proposal lie in two concepts. The first is that consequential damages (unless disclaimed) have been part of U.S. commercial law since early cases. They are a part of the "expectations" approach to damages; in any event, properly drafted and properly applied in court, consequentials are limited by "foreseeability." Second, some believe a rule providing for consequentials unless disclaimed creates a penalty default that induces a party with special knowledge to act. The sustainability of that argument has been debated in academic literature with no conclusive result.

    This issue does not involve product liability questions about personal injury. These are governed under tort law.

    Even if one rejects that the Article 2B proposal should apply to all contracts, there are many reasons to adopt it in the information law context. Initially, the risk-reward ratio in many information transactions is highly skewed. Newspapers, online data providers, magazines, and similar information providers deal with situations where the use of information that may be wrong might create huge losses. As in other modern UCC revisions, this could lead to reversing the common law presumption. The salience of that position is reflected in First Amendment values: as a general concept, we should not expose information providers to huge liability risk since that may stifle information industry activity. That idea is reflected in the pending Restatement on products liability, which reflects that modern cases and the Restatement do not treat information as a "product". In fact, most tort law dealing with liability for inaccurate information limits damages to pecuniary (actual) dollar loss.

Qualitative Performance Standards

    (1) Substantial Performance.

    The Draft employs the common law concept of "substantial performance" (or material breach), rather than the "perfect tender" rule. "Material breach" is defined in terms that parallel modern case law and the Restatement (Second) of Contracts.

    This standard currently applies to all contracts outside of Article 2 and 2A. Thus, employing the rule here avoids a discontinuity between the Draft and the common law that it supplants. It also avoids working a substantive change in general licensing law. Additionally, substantial performance concepts are well-suited to software and other licensing contracts. Licenses involve ongoing relationships and the flexibility engendered by substantial performance is an appropriate baseline. Furthermore, in software contexts, the presence of minor errors is common in complex systems As with other provisions of the Draft, this is a default rule that can be altered or controlled by contract.

    Article 2 applies a "perfect tender" rule to only one setting: the initial tender (transfer) of goods in a contract that does not involve installment sales. Article 2 does not allow the buyer to assert a failure of perfect tender in an installment contract. Even in a single delivery context, the theory of perfect tender is hemmed in by a myriad of countervailing legal considerations.

    The proposed rule holds that substantial (but imperfect) performance of a contract is a breach. However, unless a breach is material, it cannot be used as an excuse cancel or avoid the contract obligations. A party who receives substantial (but imperfect) performance from the licensor, cannot reject the tender or cancel the contract, but obtain damages.

    (2) Warranties.

    This Draft adopts an implied warranty structure different from Article 2.

    In current law, a distinction exists between the result-oriented implied warranties in Article 2 and 2A for goods the process-oriented warranties or implied obligations common in other contracts. UCC implied warranties of merchantability and fitness refer to the quality of the end product, giving the buyer certain assurances of quality unless these are disclaimed. Outside the UCC, to the extent they exist, implied obligations involve "workmanlike performance" or "reasonable care" in compiling, presenting or organizing data, designs or the like. Implied warranties of fitness are often found to be inappropriate outside the current UCC.

    In this Draft, warranty rules distinguish between computer programs and other information products. For data and other " informational content" (see § 2B-102(19)), there exists no built up history of warranty obligations under common law. This reflects both the nature of the subject matter (e.g., images, stories, survey data) and an overlay of public policy considerations grounded in part in concepts of free speech. Because of this history,

the Draft builds on modern tort law. § 2B-404 sets out a warranty that no inaccuracies exist in data that are caused by the failure of the provider to exercise reasonable care. This warranty does not apply to information distributed to the public (e.g., an electronic newspaper). That exclusion mirrors the approach of tort law in the area of "negligent misrepresentation" and reflects a number of policy considerations associated with promoting and preserving the free public flow of information. The warranty does not refer to aesthetic values or marketability (e.g., the aesthetics of a movie licensed to a theater).

    For computer programs, a greater similarity to goods exists. The primary implied commercial warranty is that the program substantially conforms to its documentation. For mass market programs, this Draft uses the Article 2 concept of merchantability.

Self-Help Repossession

    Proposed Article 2B grants a licensor in a license transaction the right to prevent continued use of licensed information and, subject to very restrictive preconditions, a right to enforce that through self help.

    While this Draft is not confined to licenses, a license provides the conceptual basis. A license consists of a limited conveyance involving primarily "a mere waiver of the right to sue." This description is not entirely applicable to many licenses in which there are affirmative grants and conveyances to the licensee. Yet, it indicates that, at least where a property right stands behind the license agreement, the licensor retains significant rights with respect to the subject matter. This makes the transaction somewhat analogous to a secured transaction, indicating the relevance of rights to repossess and prevent use in the event of material breach. (§ 2B-711)

    Digital media enable licensors to include technological means to disable software electronically. Exercise of that ability has been controversial. In extensive debates, the Committee concluded to not preclude such actions, but to place substantial limitations on when or if resort to such remedies are appropriate. These are outlined in § 2B-712 (and 2B-711). They include that the licensee must have previously assented to inclusion of the ability to do so in the digital product, that the exercise of the remedy not breach the peace or cause damage, and that there be a breach that would be material regardless of any standard contract term defining it as such.