Introduction The Uniform Commercial Code (UCC) comprises the most influential source of contract law in our country. Article 2 covers transactions in goods, primarily sales; the terms of Article 2 were designed with reference to sales of goods without much attention to contracts involving on-going relationships between commercial parties. Article 2A deals with personal property (goods) leasing transactions; the terms of that Article were tailored for the unique problems of leases. Other portions of the UCC deal with secured lending, negotiable instruments and other major commercial law topics. Overall, with the exception of real estate transactions, the UCC provides the dominant source of contract law principles for commercial practice in this country. See footnote 1

    Virtually the entire UCC is being revised and updated. The various prongs of the revision process reflect an effort to make the UCC commercial contract principles relevant to modern practice, but also sensitive to differences in how legal principles should be tailored to business practices in particular areas.

    These materials present a working draft of proposed Article 2B (licenses). The goal of this project is to develop tailored and effective contract law principles related to licensing and other transactions involving digital information and other intangibles. The Draft has not been reviewed by the Article 2B drafting committee; it will be modified before formal submission to that Committee. The purpose of distribution at this time is to solicit additional review and input in order to correspond draft provisions to the needs of this particular area of commercial practice.

I. PROJECT HISTORY

    The project that eventually evolved into the Article 2B project began with a focus on the contract law issues associated with computer software licensing transactions when these transactions were fitted within the scope of Article 2, a statute dealing with sales of goods. Over the course of several years, committees of NCCUSL, the ABA and other groups examined what consequence should flow from what appeared to many to be a mismatch in concept between contract law principles aimed at defining relationships relating to the sale of goods (article 2) and contract relationships in which intangible property (digital information and related rights) was the actual centerpiece of the transaction and the contractual format entails a license, rather than a sale.

    The conclusion reached by these committees and by representatives of the information and software industries entails two basic observations:

     1. Distinct From Sales. Intangibles transactions and, especially, transactions involving licensing of digital information differ in substantively significant ways from transactions involving the

sale or lease of goods. An extended discussion of some of the differences is presented in an article published in the Rutgers Computer Law Journal. Because of the differences, a body of law tailored to transactions whose primary purpose was to pass title in tangible property from one party to another could not be simply transported and applied to transactions whose purpose was to convey rights and privileges in the use of intangible property, information assets and the like. A separate treatment of this other commercially important class of transactions was needed.

     2. Commercial Significance. The commercial importance, both currently and in the future, of the information industry was obvious. Software and related information technologies currently account for in excess of 3% of the gross national product and the size of the industry continues to grow. The treatment of digital information, both in intellectual property law and in contract law, has become a major focus of contemporary legal and social policy debate and concern. These industries and the type of transactions covered by their enterprise are major features of the commercial landscape in this and other countries more than sufficient in importance to justify treatment 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 Law Institute, and review by numerous other groups.

Promulgation and revision of articles of the UCC occurs under the joint auspices of the NCCUSL and the American Law Institute (ALI). Monitoring of UCC developments also involves the Permanent Editorial Board (PEB) of the UCC, a group formed by the two parent organizations. In 1991, these groups reached a decision to undertake a revision of UCC Article 2. At the time that the decision was made to initiate an Article 2 revision project, a separate project existed addressing questions about what action should be considered for treating software and similar digital information contracts.

    This project was begun 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 the creation of a separate article of the UCC for software and related contracts. Shortly after that, however, groups representing the software industry objected to any uniform law development. A second study committee was appointed and after an extensive period of 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 Drafting Committee.

    The Article 2 Drafting Committee eventually concluded that an appropriate method of proceeding would be to develop a "hub and spoke" configuration for revised Article 2 under which intangibles licensing and sales of goods 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, software and information industry groups reversed their position on the benefits of uniform contract law codification. These groups concluded that treatment of the contracts affecting their industries within the UCC was not only appropriate, but highly desirable as a means of standardizing practice and providing a roadmap for the new areas of contracting that are springing up around the modern information economy. These industry groups, however, advocated the creation of a separate UCC article on licensing issues 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 toward an adoptable statute more efficient and expeditious.

    After an extended period of public discussion about the relative merits of a "hub and spoke"

approach to Article 2 as contrasted to a separate article on intangibles contracting, a decision was reached in July, 1995. At that time, the Executive Committee of NCCUSL rejected the recommendation of the Article 2 Drafting Committee and concluded that the appropriate approach for moving forward was to develop an article of the UCC dealing with licensing and other transactions involving digital information and related rights in intangible property.

    The July, 1995 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 and entirely on goods and sales of goods. It encompasses a significant focus on intangible property transactions. 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 under a sale of goods model. See footnote 2

    This same point was more recently acknowledged by a federal study group. The report by the federal task force on Intellectual Property in the National Information Infrastructure (NII) states that:

    [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. See footnote 3

The report expressly endorses this project and efforts to develop uniform contract law related to licensing.

    While a separation was mandated, the relationship between general contract law (e.g., Article 2, sales) and the subject matter of Article 2B remains close and direct. Many provisions in the current draft of Article 2 (sales) stem directly from innovations evolved in the development of this draft of Article 2B. For example, provisions on electronic contracting found in Article 2 (sales) stem directly from the drafters' efforts to integrate the demands and opportunities of the digital information world with the structures of sales of goods. The proposed treatment of electronic contract relationships stemmed from and will develop through the license law draft. Similarly, the proposed sales article benefits from insights on standard form contracts, remedies and other rules generated by the ability in a new article 2B to address problems and issues in a commercial world freshly, rather than as constrained by decisions made in the 1950's.

Working Draft

    The Working Draft presented here has not been reviewed by the Article 2B Drafting Committee. The first review will occur in early January, 1996.

    The Draft is not a new product, however. It results from discussions and review of previous drafts by a large number of industry and other groups. The Draft contains numerous revisions and theme developed during these discussions. The three predecessor drafts to this Working Draft were: 1) a Discussion Draft of intangibles contract provisions dated February, 1994; 2) a revision of that discussion draft, altered to reflect wide ranging commentary on the draft, dated September, 1994; and 3) a Prototype Draft of Article 2 in "hub and spoke" form which was published in February, 1995.

    Because so many people have been involved in and have followed this project in its various iterations, reference is made in the provisions of the Working Draft to the source history of the section in these three predecessors.

    During the period of from March, 1994 to September, 1995, the Reporter met with representatives or members of a wide range of groups to review provisions of the various interim drafts. The groups included:

    CBEMA

    ITAA

    Software Publishers' Association

    Business Software Alliance

    Information Industry Association

    Software Industry Coalition

    AIPLA

    ABA Business Law Section

    ABA Section on Intellectual Property

    ABA Section of Science and Technology

    Licensing Executives Society

    Computer Law Association

    City Bar of New York, Computer Law Committee

    New York Bar Association, Computer Law Committee

    Chicago Bar Association, Computer Law Committee

    Texas State Bar Association, Computer Section

Also, the drafts were discussed at over 60 seminars and public meetings, while a large number of individual attorneys provided written commentary on draft provisions. One three day meeting of the Drafting Committee on Article 2 (sales) was devoted to discussion of the September, 1994 draft.

    The revisions contained in this Working Draft reflect that commentary and those meetings. The Reporter personally thanks all of the many lawyers and business persons who have devoted long hours to discussion and critique of these materials. Their assistance has been and will continue to be critical in developing this project whose importance to the emerging information economy is great.

II. LAW REFORM AND THE UCC

    Since the Commercial Code is an integral and important feature of modern contract law and commercial practice, it is important that revisions or additions to the UCC reflect a sense of context and purpose. There must be, in short, a philosophy of change and direction. In dealing with licenses and Article 2B generally, that philosophy incorporates both the nature of the subject matter or context of revision and the commercial character of what is attempted in the revision process.

Modern Economy and Law Reform

    Revision of the UCC must deal with the fact that the UCC affects contracting practice and law throughout the economy. UCC Article 2 was based, however, on a model of commercial practice centered on the sale of goods. That model that does not correspond either to current contracting practices or to what issues are relevant in transactions that do not involve the hard goods transactions on which Article 2 was based. In dealing with questions of how to approach additions to or revisions of the UCC, one issue concerns addressing the actual degree of change that occurred in our economic and commercial systems since the promulgation of the Code.

    Article 2 reflects a 1950's economy. At that time, clear distinctions existed between hard goods, intangibles and services agreements. In the 1990's computerization and other technological developments, blur these once clear 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]." See footnote 4 The 1990's build on an information and services economy that could not have existed in the 1950's.

    The 1990's witnessed a rapid shift in the source of value and value production in the economy. The service sector dominates, outstripping the production and transfer of goods. See footnote 5 The information industry exceeds most manufacturing sectors of the economy in size. The software industry did not exist in the 1950's, but is now a major producer whose products present challenges to the parameters of traditional law in the trade, taxation, intellectual property and contract law. With the digitization of communications networks, the information "superhighway", and the development of multimedia products, those challenges will expand. In this environment, it is inevitable that a contract law codification which purports to be a "commercial code" adjust to the new sources and subjects of commerce. These sources and subject of commerce are not simply old products in new guises, but represent a fundamental change (or at least, an expansion) in the source and focus of value in commercial trade. How law deals with these contractually and in other ways is a major, significant and inevitable subject of modern dialogue on commercial law.

    Contracts involving the digital information cannot be ignored by a contract law code that purports to handle commercial contract law. Digital information licensing represents a major, burgeoning aspect of commerce and the transactions involved in that commercial practice are not equivalent to transactions in goods, the former staple of commercial contract law.

Yet, court decisions place software and related licensing in Article 2 (sales) even though software is licensed and not sold. See footnote 6 The count is five to one in terms of a decision that holds a software contract

to be within Article 2 (the five count) or not within Article 2 (the one in ratio). See footnote 7

    These results are motivated by at least two factors. The first is a focus on how the result of a contract is delivered. See footnote 8 Older, and still current, methods of performance of software licenses by a licensor often entail delivery of a diskette or other media holding the intangibles that constitute the program itself. Such deliveries resemble delivery of goods. This focus, however, will be increasingly problematic as electronic systems displace a need to transfer tangible copies of software or similar intangibles. The second is a product of a court's recognition that a decision to put the transaction outside the scope of Article 2 leaves the commercial parties subject to uncodified common law rules. Licensing contracts are governed by some form of contract law, but the choice in placing a transaction in or excluding it from the UCC is a choice between dealing with a codified and nationally uniform law as contrasted to an uncodified and nonuniform common law of licenses.

    Much has been written about whether software does or does not come within the definition of goods in Article 2 and particular areas of dispute continue to exist in current case law. See footnote 9 In a law reform context, this is not the proper question. We deal with how intangibles should be dealt with in contract law. In 1993, a consortia of five major trade associations related to the software and information industries took the position that licensing contracts should be placed within the UCC, but argued that this should be done through a separate article of the UCC dealing with licensing contracts. That option was adopted.

Focus of the Transaction

    In a sale of goods (or a lease of goods), the goal of the purchaser involves acquisition and use of the tangible property involved. I lease a car in order to possess and drive that car. I purchase a computer in order to employ that computer in my daily business life. Similarly, the primary goal from the standpoint of the seller (or lessor) is to obtain a reasonable return from the transfer of that item (or those items in a multi-part transaction). My desired return from the sale of a car can often be measured by comparing the cost of producing that car to the sale price received for its transfer.

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. The control, use and disposition of that unit represents a central feature of the deal from the standpoint of each party. My Mercedes may be the same model and year as your Mercedes, but they are not the same thing either in concept or transactional context. We might agree to trade our two cars one for another, but neither you nor I believe that the trade entails a transfer of identical things - my care is different in fact and in fancy from your car. We understand that, while I may purchase a Zenith television from a particular retailer, the television that you purchase, while the same model and same manufacturer, it not the same thing.

    Transactions in intangibles such as digital information, intellectual property rights and the like involve a much different calculus. If tangible property is involved, it is much more likely to be considered to be a conduit or transfer method, rather than the primary focus of the transaction. The purchaser does not seek to obtain the diskette, tape or CD per se. The important element of the transaction involves what is contained on the media (if there is a tangible medium involved). That thing and the ability to use or employ it for my enjoyment, business, or other goal constitutes the subject matter of the deal. When I contract for a right to use an IBM patent in the development of my new computer software, the means by which I obtain the information about how to use the patent matter not at all, so long as they are adequate for my purpose. What matters is the ability to have the information and to exercise rights or privileges to use in respect to the information.

    Importantly, both the information and the rights associated with that information are effectively infinitely repeatable. I can sell a particular Mercedes only once, unless I commit fraud or repurchase a car once sold. In contrast, I can license a particular patent, information resource, computer program, or other intangible an infinite number of times without ever parting with that intangible itself. I can both transfer and retain that which has the greatest value in the commercial deal. In most cases, the media that I might use to allow the licensee to obtain the ability to use the digital or other information constitutes a trivial part of the value involved. A diskette may cost one dollar, the program it contains may have more than one million dollars in commercial value.

    That this difference exists can be shown even in a mass market context. Assume that I want to purchase a copy of a major word processing program for my use in the computer I have at my office. The program is called "Major Word". I acquire a "copy" of Major Word from my local store; the copy is on a diskette. Within days after I have that copy at my office, my ability to use, to enjoy, and to benefit from "Major Word" has no relationship to the disposition of the original "copy." In fact, after I have "transferred" the program to my office computer, I may care not at all about the disposition, control, access to, use or any other disposition of then original diskette. It played a role in the transaction that is similar to the role of an envelope carrying a letter from my dearest love. Once I open the envelope and read (transfer) the contents of the letter, the envelope (goods) has no significance to me. The goods do not count; the information and rights to use that information do count.

    One difference between Article 2B (licenses) and existing UCC articles dealing with goods resides in the difference of subject matter that has just been described. We deal with here questions

about handling ideas, information, instructions and the like, along with the property rights created by state and federal law regarding these intangibles, rather than with the question of whether the car runs, the television turns on, or the drill press ..... well, the drill press, precesses.

Substantive Licensing Law

    The paradigmatic transaction in commercial deals involving digital information and other intangibles involves a license, rather than a sale of property. A license consists of a contractual grant of permission to another party to use intangibles that are property of, or that are controlled by the grantor. Both conditions apply: property and control. The consideration for the transaction rests in the ability of the transferor to give the transferee something (e.g., access, use rights, copy rights) that the transferee could not otherwise rightfully obtain.

    Whether they pertain to software, databases or any other intangible, license agreements are commercial contracts. The commercial contract present in a license has two attributes. One consists of a grant from one party to another of a privilege or right to exercise rights in intangible property to which the transferor claims a property or other interest. The grant may relate to activities such as the ability to use, copy, modify, display, disclose, perform, access or to any of a number of other actions associated with proprietary or control rights in intangibles.

    In a "pure" license (see Section 2B-102), executing a naked grant of a right or privilege (permission) is often the only action taken by the transferor. Details about the patent are on public record. In many cases, the transferee does not desire to use the patented invention, but merely to be free from possible claims of infringement. These transactions, as indicated in the Working Draft, are effectively completed as to the transferor, when the contractual grant becomes effective. In the attached Working Draft, this event occurs when a "transfer of rights" occurs.

    Yet, even here, the transaction and related contractual obligations do not end. In most pure licenses, restrictions are placed on the licensee's use of the transferred rights. Additionally, in many cases at least, the licensee must make royalty or other payments to retain the rights granted. Thus, unlike in a sale where a product is delivered and subsequently owned by the buyer, in a license, ongoing restrictions and relationships are the relevant norm.

    In more "commercial", as compared to "pure", licenses, a second element of the initial contract relationship involves actions that enable the transferee to exercise the transferred rights. This portion of the transaction can involve many different possibilities such as providing staff to communicate know how to the transferee, delivering a diskette that contains a copy of the software in which rights are conveyed, providing access codes for a remote database, delivering of specifications and designs, electronic transfer of a manuscript or written description, etc.

    Although licenses of digital information and related intangibles constitutes one of the major fields of modern commerce, law pertaining to those contractual relationships lags hugely far behind developing practice.

What law currently applies?

    In some licensing, specific regulatory statutes at the state or federal level restrict the terms and enforcement of certain types of licenses (see, e.g., state franchise or dealership laws). Federal antitrust law affects the permissible scope of license provisions in some respects. Indeed, although the antitrust law impacts depend more and more on the context, rather than simply the contract language, for many years antitrust rules were seen as the primary source of licensing contract law.

    The law relating to licensing consists of a composite whose composition will be altered in UCC revisions. There are a number of sources from which this composite currently derives and one goal of revision will be to bring together these different sources into a coherent framework. The urrent law of licensing contracts consists of differing blends of the following distinct sources:

    Article 2

    Article 2A

    Common law (information contracts)

    Common law (services contracts)

    Restatement (Second) of Contracts)

    US Constitution

    Common law torts

    State intellectual property law

    Federal intellectual property law    A goal of this project is to create some order, certainty, or predictability in the translation of these sources of law to the commercial world of digital information contracts. We seek to do this both by taking existing paradigms of commercial transaction practice and validating or relating to them, and by taking emerging fields of electronic contracting and building a validation base to allow those fields to continue their burgeoning growth. Each task entails an effort to apply commercial contract law concepts evolved through years of development and practice under the UCC to this field of commerce. We need to identify and keep in mind those commercial contract law concepts as fundamental principles and goals in drafting new Article 2B.

III. PRINCIPLES AND GOALS IN DRAFTING

    The basic philosophy in UCC provisions on commercial law builds on two basic assumptions about ommercial contract law.

Contract Freedom

    The first commercial law theme assumes that a role of contract law is to preserve freedom of contract. This idea permeates the UCC. For example, the Comments to Article 2A note:

    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. See footnote 10

The idea of flexibility in contracting is embedded in contract theory. Most analyses of commercial contract law simply assume that flexibility exists and should be fostered. The policy discussions regarding commercial contract law center on what enabling or shaping influences should be enacted in a context dominated by party autonomy.

    The idea that parties are free to choose terms can be justified in a number of ways. See footnote 11 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.

    Contract flexibility differs from open-textured interpretation by courts. The one (contract freedom) refers to the ability of the parties to define their relationship. The other (open textured interpretation) grants a court the ability to refer to material outside the contract to explanation the contract. See footnote 12 Open-textured analysis occurs if a dispute is brought before a court that uses the interpretation principles. The belief is that contextual interpretation more accurately reflects the intent of the parties.

Commercial Facilitation

    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. See footnote 13

    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 discernable and understandable to commercial parties.

    How one decides what rules will best facilitate contracting practice is a matter of dispute in modern literature. The dispute suffers from a failure of knowledge; we know little about how contract law and contract practice interact. 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.

    The idea that default rules should relate to commercial practice has been relatively widely

accepted. One description about how default rules assist in facilitating contracting goes as follows:

    [The] law supplies standardized and widely suitable [terms] which enable parties to [use] an implied formulation [and eliminate] certain ... costs and errors arising from individualized specification of terms. ... Thus, state-supplied terms provide the parties with time-tested, relatively safe provisions that minimize the risk of unintended effects [while the risk of distortion] can be reduced by exercising the option [of contractual flexibility] to specify ... express terms. See footnote 14

Of course, the relationship between default terms and contract practice is more complex. Yet, the concept hinges on default rules that are standardized and "widely suitable" such that they can be frequently used without disruption or costly negotiation; a reference geared to transactional practice. See footnote 15 Background rules tied to the ordinary, but actual commercial context tend to achieve that result, they 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.

    Rules selected to promote commercial practice also have a second function suggested by the Gilmore quotation noted above. In addition to sustaining existing practices, such rules can serve to free up opportunities and remove obstacles: to seek a context in which a transaction, when undertaken, will lead to a predictable result in terms of obligations created and risks distributed. This is a more forward looking function for a contract code and has special importance in our context because some of the fields of contracting practice that are covered here involve evolving practice juxtaposed against contract principles that do not necessarily sustain or even provide a clear basis for the goals of the commercial entities in terms of the relationship created. See footnote 16

IV. THEMES IN THE DRAFT.

    The Draft adopts the principle of contract freedom and a basic assumption that commercial and other parties are able and entitled to define their own relationships. This is a commercial code, not a regulatory statute.

    The Draft suggests a number of tailored default rules that are subject to revision by contract of the parties. The Draft states this basic principle in Section 2B-112, which adopts a clear mandate of

contractual freedom and choice.

    The primary exceptions to this proposition rest in provisions dealing with good faith, unconscionability and similar concepts that traditionally are used in codification and in common law to regulate a baseline of commercial morality or fair practice. (Section 2B-110 (unconscionability)). Beyond those limited constraints, the basic philosophy here entails a decision that the goal of law is to preserve, protect and enhance the ability of commercial entities to do business in ways that correspond to their own interests.

    Cutting through this principle, however, exists a variety of consumer and end user protection issues. Many digital contracts involve a commercial transferor conveying rights to an individual user, either a consumer or a business person. In such relationships, the mix that exists in a purely commercial deal and that emphasizes the ability of two parties to tailor their own deal shifts somewhat. Individuals are not equally positioned against major licensors and a commercial code drafted for the 1990's must recognize this.

    In this Draft, treatment of such issues focuses on providing information and on requiring explicit acceptance or terms or conditions by an individual before these become part of the contractual relationship. The draft rejects a regulatory approach that mandates terms and conditions in favor of a free choice approach, encouraging information transfer and choice as a model for contract formation and enforcement.

    Beyond these basic themes, there are a number of propositions and approaches that are critical to be understood in delving onto the details and structure of the Working Draft. These include the following subjects.

Digital Information.

    This draft does not deal with all contracts relating to intangibles or intellectual property rights. The scope is defined by the subject matter. Article 2B covers transactions in digital information. See footnote 17 This constitutes a refinement of early drafts and a response to the many people who have reviewed and reacted to the first drafts of this proposal.

    "Information" is a defined term. It includes:

    includes data, text, images, sounds, computer programs, software, databases, and the like, and any associated intellectual property rights. See footnote 18

    The origins of this project lie in proposals focused on the software and related information industry. Today, however, software constitutes an ubiquitous element of all information products. It can be defined in various ways, but in a digital world and a world in which technology based on software and computer processes shapes what is and can be done in industry, this draft opts for a more fluid and expansive definition of scope than seeking to sort out the distinction between "software" and other elements of an information product. Given the intertwining of software and the

information products it permeates, limiting scope to software would be arbitrary and ineffective.

    Only digital information comes within the statute. "Digital" means information in electronic form consisting or binary or other digits. (Section 2B-102(14)) In common practice, digital means a system that uses only two states to represent all data, 1s and 0s. To "digitize" a product is to convert it into a series of electronic dots (the 1s and 0s) that can be stored, displayed and modified on a computer (i.e., scanning). Sounds, texts, images can all be digitized.

    In this information age any line created among information-based commercial products will necessarily be arbitrary in part, but it is believed that a focus on digital information provides a relatively clear and commonly understandable line of demarcation in current practice. Early drafts of this proposal covered all forms of intellectual property ( intangibles) contracting, including licenses of patents and copyrights. That proposal, conceptually correct, drew significant controversy and complaint from segments of that portion of the practicing bar and commercial interest involved in intangibles contracting entirely divorced from the commercial practice involved in software, data products, and related information systems. This draft excludes licenses of patents, trade secrets and similar rights not related to digital information. This is a commercial statute that should draw on the experiences and needs of industries with significant commercial activities that have relevant similarities. See footnote 19

    An argument can be made that the proper line would cover all information products. The issue can be debated during the coming year. The effort here is to provide a focus that crates coherence, rather than diversity. The policy question is whether the medium creates a viable dividing line. Among the arguments for drawing this line is the fact it is only the digitized form of information that creates many of the needs and unique relationships addressed in Article 2B. For example, the law is well settled about what it means to sell a newspaper or a book and what obligations arise. In the on-line services sector, however, virtually all contract law issues are unsettled and an objective of the project will be to provide a more certain basis for contracting practice in that digital environment. More generally, Article 2B codifies a coherent structure for transactions in the major new industry of the 20th century, computer software, which is a digital information product.

    Because the same information may be on both sides of the line (digital and nondigital), however, Article 2B must be sensitive to avoiding contradictory results not justified by the medium. Under existing law, a book publisher does not warrant the accuracy of information in a "paper" book. Article 2B should apply the same rule to digitized "books" to avoid anomalous results unless a commercial policy basis exists to alter the result. See footnote 20 Because of issues like this, the proposed provisions in this draft often seek to tailor outcomes to minimize the relevance of media changes.

    Earlier drafts of proposed Article 2 focused solely on "licenses", a term defined to encompass both the conditional transfers that are ordinary in intellectual property practice and the treatment on modern, online systems of information resources. This limit generated concerns centered on the fact that licensing agreements may, at some point, evolve into other forms of transaction, creating ongoing interpretation and application problems. The draft proposal covers more than licensing, but employs a license as the paradigm transaction. This mirrors the approach in original Article 2 which covers transactions in goods, but utilizes the sale of goods as the primary focus for defining the rights of the parties. The features found in licensees and incorporated here focus Article 2B on the area of greatest need and greatest commercial impact not currently covered effectively by the UCC. Licensing is the

most common transaction in digital information and its characteristics inform Article 2B.

Transfer of Rights.

    The unit of value exchanged focuses on the intangibles, rather than the goods that may or may not be used to convey information and rights to a transferee. What the contracts covered here center their commercial attention on is the digital information, the rights in that information, and the contract rights or privileges created. This is an important conceptual shift that distinguishes what we do here from the tasks addressed in Article 2 (sales) and Article 2A (leases).

    Because intangibles (digital information) and rights in intangibles are the focus, the potential methods of making a transfer are more diverse than in cases involving transfers of goods. Rights can be "transferred" in numerous ways: a computer program can be written on-site at the transferee's location, the transferor can give a transferee remote access to an information asset, a contract can be executed and create right without any tangible or intangible material changing hands, a transfer may involve electronic transfer (downloading), or delivery embedded in a tangible item. Case law already contains disputes that illustrate issues in reference to each of these forms of transfer. Modern developments make methods of transfer increasingly fluid as we move further into an era defined by the so-called "information superhighway."

    The Draft seeks transfer method irrelevance as a basic drafting concept. This principle holds that changes in how the transfer of rights occurs should not alter the applicability of the article. Some transactions involve remote access to a licensor's computer, while others occur by delivery of a diskette. This does not place one transaction within the UCC, while the other is governed by common law. In some cases, the method of transfer and the market in which the transfer occurs affect what default principles 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.

    Because physical "delivery" is not an inherent characteristic of a digital information transaction, this Draft employs an alternative concept: "transfer of rights." A transfer of rights is defined to incorporate a contractual authorization, any steps necessary to enable the transferee to exercise the rights that were transferred, and the transferee being aware that those steps (if any) occurred. ( Section 2B-108) Basically, a transfer of rights incorporates a contractual authorization, any steps necessary to enable the transferee to exercise the rights that were transferred, and the transferee being aware that those steps (if any) occurred.

     Example: If A grants B a license to use a computer program to operate B's computer and the transaction contemplates that the program will be made available in diskette form, a transfer of rights occurs when the diskette is delivered pursuant to the agreement.

     Example:If A grants B a license to use A's computer and software contained thereon to process B's data, a transfer of rights occurs when the contract is made, access codes and numbers are provided, and the remote computer is on-line and available to be accessed.

     Example:If A grants B a license in A's patent relating to computer software without more, a transfer of rights occurs when the license is enforceable since the information to allow use by B is contained in public records available immediately (even before the transfer) to B.

    The primary contractual relationships here (e.g., licenses, continuous access contracts) are defined in terms of transferring rights in a particular digital information asset to the transferee.

As in Article 2 and Article 2A and under common law, a tender of performance creates in the transferee an obligation to accept or reject the performance. Neither the tender, nor the acceptance, however, fully define the rights, obligations or performance of the parties because this is an ongoing relationship, rather than the typical sale of goods which entails a delivery, acceptance and payment as the entire contractual model for performance by both parties. In some cases, the tender of rights and its acceptance are the sole significant issues, while in many others, these steps have limited importance.

Licenses and Access Contracts.

    While the scope of this Draft is not confined to licenses, a license contract provides the conceptual basis for the structure of the Draft and the primary contractual relationship to which it relates. Because of the central role of such transactions, the terms "licensor" and "licensee" are treated as generic terminology, applying to transferor and transferee in any contract involving digital information.

    As one observer has pointed out, transactions involving digital information can involve several types of rights transfer. In some cases, a deliverable is present in the form of a diskette or a downloaded computer program. In others, the subject matter deals more directly with information itself, which need not be delivered, but can simply be accessed and read or understood. Finally, in some cases, the license consists of a pure conveyance of intellectual property rights. This Article deals with all three.

    The obligations creates and risks distributed in a license provide a central basis for the terms of this Draft because that form of transaction constitutes the most common and commercial significant method of conveying rights in information. A license is neither a lease nor a sale. Both of those terms apply to transfers which focus on goods, rather than rights in intangibles. The Draft defines a "license" as:

    means an agreement for a transfer of conditional or limited rights in digital information, whether or not the agreement provides for delivery or sale of a copy of the digital information and whether or not the limitations or conditions are express or implied. The term includes (i) an access contract and (ii) a software contract if the transferee did not intend to become the owner of the intellectual property rights in the software. The term does not include the reservation or creation of a security interest in digital information. See footnote 21

The Supreme Court has described a patent license as "a mere waiver of the right to sue." See footnote 22 The Federal Circuit Court of Appeals more recently 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. See footnote 23

    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. A "pure license" is defined to cover transactions in which nothing more than rights to use existing (patented) technology is transferred to the licensee.

    There are situations in which a license under current law is a more complete transfer of property rights. Thus, for example, an "exclusive license" is treated as a transfer of ownership under copyright law. In software transactions that involve a sale and delivery of a copy of the program on a diskette to the licensee, the licensee receives certain vested rights in that copy by virtue of federal law. See footnote 24 The transaction in itself vests the transferee with more substantial rights than the mere privilege to not be sued.

    Despite situations where a license is a more substantial transfer than described by the quoted language above, a license is far different from the comprehensive property grant that characterizes a sale of goods. A license is a conditional, limited transaction. This premise is brought forward into many of the provisions of the proposed Draft: It yields a number of substantive default rules such as:

    . a licensee's rights are not transferable unless made so by the contract or unless the transferee became the owner of a copy. (2B-502)

    . in the event of a default, a party has a right to prevent further use of the licensed rights by the licensee. (2B-713)

    . the transferee does not ordinarily have a right to make a transaction that results in the creation of a "transferee in the ordinary course" free of the license restrictions. (2B-508)

The limited nature of the transfer also affects how one should handle implied warranties relating to title and infringement.

    Another type of transaction covered here is closely related to and often popularly described as a license. This form of transaction involves an "access" contract or, in its most common form, a "continuous access contract." Section 2B-102(10) defines such contracts as:

    means an agreement that transfers a right or privilege to have access over a period of time to digital information, a resource for processing digital information, data system, or other similar facility of the licensor or a third party, and gives the transferee a right of access at a time substantially of its own choosing subject to limitations on the general availability of the digital information, resource, data system, or other facility.

The focus centers on licensed access to an information resource. This form of relationship calls into play a variety of ongoing obligations of the parties (e.g., the obligation to pay for access, the obligation to maintain accessibility) that are not present in other license relationships.

Electronic Contracts.

    Because of the digital subject matter it addresses, this Draft deals extensively with questions relating to electronic contracts, both in the formation of such relationships and in reference to contracts performed and monitored electronically. It is in respect to this area of contract practice that the White Paper referred in endorsing the value of this project for the evolution of commercial practice in the information era.

    Several provisions dealing with electronic contracts in this Draft have been tentatively brought over to Article 2 (sales) in draft form, pending refinement for purposes of the two areas of commercial practice. It is in reference to digital information contracts, however, that the realm of electronic contract practice has its broadest scope.

    In broad terms, the electronic contract provisions contained here entail two distinct focal points. The first deals broadly with formation questions. Here, there are mechanical as well as deeply philosophical issues about the proper treatment of electronics. At the most simple level, this Draft adopts the use 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, first used in revised Article 8, promises to become standard UCC terminology.

    More broadly, however, the Draft 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. The Draft 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.

An illustration of this is in the definition of "conspicuous." This term has meaning in reference to the enforceability of various terms in a contract (e.g., disclaimers), but has the underlying conceptual underpinning of being a term referring to how likely a person is to actually see the reference. In a computer-based transaction, the size of the letters used or their placement does not relate to that question. The proposed definition of "conspicuous" includes the following language:

    "Conspicuous," with reference to a term or clause, means so displayed or presented that a reasonable person against whom it is to operate would likely have noticed it or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable the recipient or the recipient's computer to take it into account or react to it without review of the message by an individual. Whether a term is conspicuous is a question of law. See footnote 25

It has been argued that this electronic reference should be placed under different terminology, albeit with the same substantive effect, and one possible revision will be to create a new term (e.g., "machine readable") and define that in reference to electronic messages. A "machine readable" message could be defined as conspicuous in a computer transaction.

    A second illustration of the same approach is in the treatment of offer and acceptance electronically. Section 2B-205(b) provides:

    A contract is created under subsection (a) even if no individual representing either party was aware of or reviewed the initial message, the response, the reply, the

information, or the action signifying acceptance. Electronic messages are effective when received even if no individual is aware of its receipt.

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.

    The second focal point of the electronic contracting issue deals with performance and performance control electronically. Digital information can be transferred, accessed, used and employed for valuable commercial reasons entirely electronically in digital media. The approach of this Draft to electronic performance and control issues is to validate contractually established methods of performance, but in cases where potentially adverse impacts are imposed on one party, to require advance notice and consent. For example, 2B -631 provides:

    (b) If it gives prior notice to the other party in the contract or otherwise, a party may include in digital information electronic means to enforce the rights stated in subsection (c) on the expiration of the license term and apply that electronic means at the end of the license term without judicial process.

    (d) Electronic termination is not wrongful if consistent with the expiration of the contract term. Electronic termination prior to expiration of the contract is a breach, unless the termination occurs under circumstances allowing cancellation by the terminating party.

    Consistent with UCC terminology, "termination" entails ending a contract relationship for reasons other than a breach of contract by the other party. Thus, the electronic methods referred to here do not involve control and repossession, although that issue is also dealt with in the Draft.

Section 2B-321 deals with how law and contract allocate the risk of loss associated with unwanted code or viruses. There is a mutual obligation here for each party to use care to protect the other. That obligation, of course, can be altered and eliminated by contract, but provides a starting point of analysis.

Performance: Not Merely Delivery.

    Most licenses create a continuing relationship. The character of the continuing relationship varies depending