Impact of Article 2B

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This is an unofficial draft of Article 2B from April 15, 1998. For the current official version, see the University of Pennsylvania Law School (Official NCCUSL) site at http://www.law.upenn.edu/library/ulc/ulc.htm

SECTION 2B-619. AGREEMENTS BETWEEN FINANCIERS AND LICENSEESFINANCIAL ACCOMMODATION CONTRACTS.

(a) If a financier does not become a licensee, the following rules apply:

(1) The financier does not receive the benefits or burdens of the license.

(2) The licensee's rights and obligations with respect to the information and informational property rights are governed by:

(A) the terms of the license contractand this article;

(B) any rights of the licensor under other applicable law; and

(C) to the extent not inconsistent with subparagraph (B) and (C) the above, the financial accommodation agreement between the licensee and the financier.

(b) If a financier becomes a licensee and transfers the license to a licensee receiving the financial accommodation, the following rules apply:

(1) A transfer to the accommodated licensee is not effective unless:

(A) the transfer is effective meets the conditions for transfer under Sections 2B-502 and 2B-503; or

(B) the following conditions are met:

(i) before the licensor delivered the information or granted the license, the licensor received notice from the financier giving the name and location of the accommodated licensee and clearly indicating that the license is being obtained in order to transfer it to the accommodated licensee;

(ii) the financier became a licensee solely to make the financial accommodation; and

(iii) the accommodated licensee accepts adopts the terms of the license., the financier becomes a licensee solely to make the financial accommodation; and before the licensor provides the information or grants the license in informational property rights, the financier delivered notice to the licensor giving the name and location of the accommodated licensee and clearly indicating that the accommodated licensee will be the only licensee of the information or informational property rights.

(2) A financier that makes ing a transfer effective under paragraph (1)(B) may make only the single transfer contemplated by the notice unless the licensor consents to a subsequent transfer or any subsequent transfer is effective under Section 2B-504.

(c) (3) If a financier effectively transferred a license to an After an effective transfer to the accommodated licensee, the following rules apply:

(1) The accommodated licensee becomes a party to the original license and the its accommodated licensee's rights and obligations with respect to the information and informational property rights are governed by:

(A) the terms of the license contractor, if applicable, the provisions of this article;

(B) any rights of the licensor under other applicable law; and

(C) to the extent not inconsistent with subparagraphs (A) and (B) the above, the terms of the financial accommodation agreement between the financier and the licensee.

(24) On completion of an effective transfer to the accommodated licensee, tThe financier is no longer a licensor.

(5) The financier makes no warranties to the accommodated licensee other than any express warranties in the financial accommodation agreement and the warranty of quiet enjoyment underin Section 2B-401(b) and any express warranties in the agreement between the financier and the licensee.

(ed) Unless the accommodated licensee is a consumer, a provision in if the financial accommodation agreement that so provides the accommodated licensee's obligations promises under that agreement and any related agreements become are irrevocable and independent is enforceable. of the license as between the financier, the licensee and any transferee of either party. The obligations y become irrevocable and independent upon

(1) the licensee's acceptance of the license or on payment by the financier to the licensor, unless:

(A) the information or informational property right was selected, created, or supplied by the financier;

(B) the financier provides support, modifications, or maintenance for the information; or

(C) the financier holds informational property rights in the information; or

(2) the licensee's acceptance of the license and the transfer to a third party of the financial accommodation contract agreement between the licensee and by the financier to a third party.

(fe) As between the financier and the accommodated licensee, the parties may agree which of them financier is entitled to the possession of any copies, improvements, or modifications of the information provided by the licensor, but the effect of such an agreement on under the license if the financial accommodation agreement so provides. However, the financier's rights with respect to the licensor is are determined by under Section 2B-5034.

(gf) On material breach by of a financial accommodation agreement by the accommodated licensee, the financier may:

(1) cancel its thcontract with the accommodated licensee at agreement but may not cancel the license; and

(2) subject to Section 2B-5034, exercise against the accommodated licensee its other remedies under the contract financial accommodation agreement or this article.

Committee Action:

a. In December, 1996, the Committee concluded, by a consensus, that treatment of financing arrangements should be limited and generic. The concept is to allow creation of an interest, but not sale without consent.

b. Did not adopt a motion that the "hell and high water" rules should apply even though the contract does not so provide. Vote: 5 - 5 (April, 1997).

Reporter's Notes:

1. Scope. This section integrates treatment of security interests and finance leases. It deals with the rights among the parties, while Section 2B-503 deals with the creation of the interest in a license. The critical distinction, implemented here, is between a traditional loan arrangement where the financier does not become a party to the license and the relationship that exists more in reference to three party leases where the lessor (financier) acquires the property (license) and transfers it to the licensee.

The financial accommodation is conditional on the licensee's assent to the license. In the absence of such assent, the licensee may have no rights to use the information and, thus, the transaction is illusory from its standpoint. This transaction is different from the ordinary equipment lease because of the central importance of this license agreement and the provisions here recognize that importance. (see also the treatment of when promises become irrevocable).

2. Licensor and Licensee Direct Contracts. Subsection (a) involves a situation where the licensor contracts directly with the licensee as to the information, even though the lessor may also have a contract relationship with the licensee. The key fact is that the financier is not bound by the obligations of the license, but is bound by the limitations of the license. The licensee's rights are governed first by the license and secondly by the financial accommodation agreement.

3. Financier as a Transferor. Subsection (b) deals with the less common situation where the license is actually provided to the financier and then passed through to the licensee. Here, when the eventual licensee takes on the license, the financier is taken out of the transaction as between the licensee and financier for purposes of qualitative performance issues. The licensee becomes a direct party to the license.

4. Hell and High Water Clauses. Subsection (e) provides rules pertaining to hell and high water clauses. Promises become irrevocable if the agreement so provides and the financier was not an active, substantive party to the license. The rule is not needed where the financier never acquires a position as licensor/ licensee, but is helpful in the three party context.

Article 2A-407 provides that the promises become irrevocable on the lessee's acceptance of the goods. In a transaction under that article, goods are sold to the lessor and sent to the lessee. If there is non-payment by the lessor, the seller's remedies are against the lessor (not the lessee). In a license transaction, however, there are two different elements. First, if the licensee contracts directly with the licensor, non-payment may give a contractual right of action for the price against the licensee even though its financial accommodation contract called for payment by the lessor. Second, in a license, payment is typically a condition on the licensee's rights to continue to use the information. Thus, although the financier was to pay, the licensee may be placed in a position of paying twice if the lessor fails to do so.

To reflect these problems, the irrevocability concept as between the two parties is limited here not only to acceptance of the transfer, but also payment to the licensor. Subsection (e)(2) refers to the common situation where the contract allows irrevocability when it is transferred to a third party.

5. Right to New Versions. Subsection (f) deals with an area of litigation in the leasing industry, focusing on the relationship between the three parties in reference to update and the like made available during the license term. As between the financier and its debtor, possession and rights of control can be apportioned by the financing agreement. As to the licensor, however, Section 2B-503 controls.

6. Remedy. Subsection (g) states a primary right of the financier in the event of breach. Since the financier is not a party to the license, it cannot cancel that contract.

[D. Performance Problems]