Notes to this Draft: This Section was created from material formerly in Section 2B-103(b). It was moved to a separate section for clarity and in conformance with the style followed in Article 9. The sections have been edited to fit this format. Subsections (6)(7) and (8) are new and implement the Committee's vote at the March, 1998 meeting. Subsection (3) has been revised to reflect extensive debate.

1. General Approach. This Section brings together various exclusions from the scope of Article 2B. The rationale and scope of the exclusions differ. They reflect, however, a judgment that the various policy and structural decisions made in developing Article 2B may not be appropriate in the listed situations. As with existing Article 9, the fundamental scope of coverage of conditional transactions in information as a commercial activity extends to many relationships in the modern economy. Since article 2B allows most provisions to be altered by agreement, this extension has little effects in the many situations where customs of trade, course of dealing, or formal contracts define the relationship. In those contexts, Article 2B provisions defer to the agreements. Nonetheless, specific exclusions have been considered important in some cases to clarify that other law governs, including regulatory laws where applicable.

The exclusion covers situations where the information transfer is merely inherent incident of the excluded services. Thus, a services contract to provide legal advice to a client may result in the delivery of a memorandum or other document containing information whose use may be restricted by contract. The information aspect of the transaction does not fall within this Article; the services are not within the scope of the Article and the information is a mere incident of that services relationship. Of course, as various personal service provides engage in related, but broader activities, Article 2B applies. Similarly, where the services are those of an independent contractor hired to develop software, Article 2B governs the transaction since it directly applies to software contract even though the software is to be created as part of the contractual relationship.

The exclusion also covers information that is only a very minor part of a transaction. What is meant here is not simply that personal services or goods predominate, but that the licensed information is so small a part of the transaction that it would be cumbersome, confusing and awkward to apply Article 2B to that small part of the transaction.

3. Patent and Trademark Licenses. Subsection (2) excludes patent and trademark licenses not associated with the other subject matter of the Article. The basic principle is that, if the only basis for bringing a transaction under Article 2B lies in the existence of a trademark or patent license, the transaction is not under this Article. The rationale lies in the differences between copyright and digital licensing and practices in unrelated areas of patent law. Patent licensing relating to biotech, mechanical and other industries entails many different assumptions and standard practices that are not incorporated in this Article. This is also true for trademark licensing. As to trademark licensing, there is the additional consideration of coverage of aspects of that industry under federal and state franchising laws

4. Embedded Programs. Subsection (3) excludes computer programs that are part of goods and sold as such. This excludes programs such as airplane navigation or operation software, software in automobile brake systems, and the like. Issues about this type of software are governed by the law governing the transaction in the entire product (e.g., Article 2 or Article 2A).

The exclusion does not apply if the program is in goods that are merely a copy of the program (e.g., a diskette) or in a computer (e.g., embedded operating system software). This, Article 2B does not apply to cars, toasters, washing machines and other traditional goods, even if part of the goods consists of software. On the other hand, Article 2B does apply to copies of programs and to software within a computer system. Even then, of course, Article 2B does not apply to the product, but merely to the program.

The term "computer" is not defined in this Article, but has been defined in many other situations as referring to a machine or system that has the capability of performing arithmatic, logical or processing functions on data. Clearly, the scope of the term and its application will change as modern products become increasingly "intelligent - reliant of information processing and manipulation capabilities. As this occurs, the issue will center on establishing the relative distribution of coverage between this Article and Article 2 or 2A. In discussing this, however, it is important to recognize that, in the mass market, where the issues will be most significant, Article 2B contract principles are generally consistent with existing Article 2 and Article 2A. In many instances, the choice of applicable law does not alter the substantive standards.

Sub-part (C) sets out the general standard that a court should gauge scope of coverage of Article 2B as to computer programs within the inevitable gray areas by applying Article 2B to the embedded software if contained in a product whose primary purpose is to provide access to the functional or other attributes of the program, as contrasted to performing other activities. Thus, while a television set in modern practice is increasingly driven by computer programs, it remains a television set whose purpose is to provide television program reception unless or until the system evolves into something more or different in which a primary purpose is to offer software processing capability.

6. Core Financial Functions. Subsection (4) excludes core banking, payment and financial services activities. Article 2B does not cover transactions governed under other UCC law (e.g., Article 4A, Article 4). It is preempted to the extent of specific controls under federal or state banking regulation.

This is not an exclusion of banks or financial institutions per se. Modern developments in digital cash and similar systems place many companies other than traditional banks in the same situation. Regulations, such as Regulation E on funds transfer, do not apply solely to banks, but to any holder of a depository account and, depending on regulatory decisions, non-bank entities will be included (e.g., a digital account on a "smart card" for use to purchase a total of $100 of coffee from a coffee shop). However, modern banks engage in many activities identical to licensing practice and online systems clearly within Article 2B, such as Netscape, Westlaw, Home Shopping, Microsoft Network, America On-Line, and others. As the information industries converge, so too is the banking industry converging into fields identical to that of the information industries. Bank entry into these fields is regulated, but this is scope regulation, not content regulation. These activities are covered by Article 2B.

The exclusion applies to the extent that the agreement gives access to performs the listed activities. Software provided by entities covered by entities involved in activities within the exclusion is not in itself an excluded transaction. When used to access the listed assets or conduct the listed transactions, however, liability and other issues are governed entirely by law applicable to that other subject matter.

7. Personal Services. Subsection (5) deals with services contracts. The excluded cases involve personal services; the law governing employment and other personal service activities entails different default rules and business practices than apply here. The entertainment services exclusion covers both direct contracts with individuals and various structures under which a party hires services of an individual or group through a loan contract with a legal entity with whom the individual or group is employed.

The exclusion does not cover situations where automation creates a digital replacement for activities previously characterized as personal services. Also, it does not remove from this Article the various forms of software development contracts, many of which today are characterized by an individual (or group) contracting to design and develop software for a client. Inclusion of these contracts in Article 2B reflects one of the primary early reasons for the Article itself since, in the absence of that inclusion, courts are wildly split in terms of whether such contracts fall within Article 2 (sales) or common law (services). Article 2B resolves that issue by bringing the contracts into a coherent framework that does not hinge on this often arbitrary classification issue.

8. Broadcast, Movies and Cable. Subsections (6) and (7) propose exclusions of traditional licensing in the motion picture, broadcast and cable industries. The exclusion reflects various considerations, including both some regulatory overlay (cable and broadcast) and the different nature of liability and other concerns involved. The exclusion is limited to traditional activities in these areas and, as with reference to financial systems, is not an exclusion of the industry. As companies move into on-line systems, software, multi-media and similar licensing, Article 2B applies.