(a) This article applies to:

(1) licenses and software contracts; and

(2) agreements to provide support for, maintain, or modify software related to a software contract that is included in this article.

(B) is a license of a trademark, trade name, trade dress, patent, and related know-how not associated with a license that is otherwise within this article;

(C) is a sale or lease of a product that has a computer program embedded in it, but this article applies if the product is:

(c) If this article governs part of a transaction and other contract law governs part of the transaction, the following rules apply:

(1) This article applies to contract issues regarding the informational property rights, information, and the media that contains the information, its packaging, and its documentation, but

Article 2 or 2A governs as to the other goods in the transaction including subject matter excluded under subsection (c)(2).

(2) The contract formation rules of this article apply to the entire transaction if:

(A) the contract includes services that are not within this article, but the subject matter that is within this article is the predominant purpose of the transaction[; or

(3) Except in a consumer transaction, the parties by their agreement may elect to have this article or other applicable law govern contractual rights and remedies for the entire transaction.

"Agreement". Section 1-201."Computer program". Section 2B-102. "Consumer". Section 2B-102. "Contract". Section 2B-102. "Copy". Section 2B-102. "Document of title". Section 1-201. "Information". Section 2B-102. "Information processing system". Section 2B-102. "License". Section 2B-102. "Money". Section 1-201. "Party". Section 1-201. "Person". Section 1-201. "Rights". Section 1-201. "Sale". Section 2B-102. "Software contract". Section 2B-102.

a. Rejected a motion to limit scope to "coded", "digital", "electronic" or similar concept. Vote:10-3.

b. Adopted a motion to limit scope to licenses of all information and software contracts. Vote: 10-0.

c. Rejected a motion to include all patent and trademark licenses in the Article. Vote: 9 - 3.

d. Rejected a motion to include all patent licenses. Vote: 8-4 (Feb. 1997)

e. Rejected a motion to delete exclusion of trademark and patent licenses. Vote: 7-4. (Feb. 1997)

f. Adopted the financial process exclusion in principle. Vote: 8 - 0 (Nov. 1997)

g. Accepted subsection (c)(3) by consensus. (Feb. 1998)

h. Consensus that financial asset exclusion not generally cover software provided for that purpose (Feb. 1998)

1. General Premise. This article deals with transactions in the copyright and information industries. These industries play a major role in the information economy. The article does not cover all contracts in these industries or all contracts involving information. It focuses on license contracts and on transactions typically conducted in areas of commerce associated with digital technologies. It does not cover sales of books, newspapers, or magazines.

The transactions covered and the source of the value in these transactions lies in the intangibles, their quality, and the rights to use the information that the licensee receives, and not in goods that may be used to communicate that information.

The article does not deal with unrestricted sales of intellectual property rights. Modern law recognizes a distinction between assignments of rights (e.g., absolute sale of all rights in information) and licenses (conditional grant of rights). The distinction parallels that between sales and leases in transactions in goods.

2. Basic Scope Rules. Subsection (a) states the affirmative scope of Article 2B subject to limitations in (b). The scope of the Article does not cover ordinary personal services or transactions that involve subject matter that is not a software contract or a license.

As in every other context in which digital and other modern information technologies have had significant impact, they create difficult problems of placing the new technologies and technology products within legal categories. That issue affects tax law, communications law, intellectual property law, and many other fields. It affects Article 2B scope. The current scope is based on extensive discussion. The Committee rejected proposals to limit scope to digital information. Modern convergence of technologies makes reference to digital or a similar term unworkable and its link to a specific technology makes the long term viability of such a focus suspect. The Committee opted to focus on licensing and software contracts and to employ a general definition of "information" to which those contracts pertain.

a. License. A "license" is a contract that focuses on rights and privileges to use information, information processing resources, and informational property rights; the contract expressly conditions the rights conveyed or expressly grants less than all rights in the information. Section 2B-102. Except with respect to computer software, this article thus does not deal with unrestricted sales of copies of information (e.g., books, newspapers). In an unrestricted sale of a copy, the information provider does not contractually condition use. It authorizes sale and relies on copyright or other law to restrict use of the information in the copy. Implied conditions, which are often present because of copyright law, do not in themselves place the transaction within the scope of Article 2B.

The key facet of a license is that the contract imposes express limits on the use of the information. Because the transaction focuses on intangibles, rather than goods, a license can and often does coexist with a transfer that constitutes a sale of a copy of the licensed subject matter. See Applied Information Management, Inc. v. Icart, 1997 WL 535813 (EDNY March 3, 1997); DSC Communications Corp. v. Pulse Communications, Inc., 1997 US Dist. LEXIS 10048 (ED Va. 1997).

b. Software Contracts. Exclusion of unrestricted sales of copies of information leaves undisturbed major segments of the traditional information industry. For computer software, rather than focus on the contract terms, the more important factor involves the nature of the product. With the exception of some limited types of software products, all transactions whether licenses or sales are subject to either express or implied limitations on the use, distribution, modification and copying of the software. These limitations are commercially important because (unlike in newspapers and books) the technology makes copying, modification and other uses easy to achieve and essential to even permitted uses of the software. Bringing all transactions involving this subject matter into Article 2B reflects the functional similarity of the transactions and the need for a responsive and focused body of law applicable to these types of products. In addition, as a relatively new form of information transaction involving products with distinctive and unique characteristics, no common law exists on many of the important questions presented in contract practice.

3. Gravaman of the Action. Article 2B adopts the "gravaman of the action" test. This Article applies to the extent that the transaction involves subject matter within its scope, but not to the extent that a particular subject matter or aspect of a relationship is excluded or otherwise outside the scope.

This rejects the "predominant purpose" test that many courts use in reference to current Article 2. That test requires a court to determine, after the fact, whether the predominant purpose of the transaction was for goods or for common law subject matter. While this results in a single contract law applying to the entire transaction, the basis on which this occurs is often uncertain and subject to litigation, while its effect is often to apply a body of law suited to goods to transactional aspects involving personal services to which that law is inappropriate.

4. Exclusions: Other UCC Articles. Subsection (b) sets out various exclusions from Article 2B scope. Subsection (b)(1) excludes coverage of the subject matter covered by other U.C.C. articles and any related rights or remedies associated with the subject matter. The exclusion must be read in connection with subsection (c)(1). "Subject matter" refers to the general topic of the other article. Thus, Article 2B does not apply to an Article 4A funds transfer or any liabilities associated with that transfer.

There are several exceptions to this general rule of deference to other articles. One involves the treatment in Article 2B of financiers as their contracts pertain to licenses and software contracts. This subject matter is also covered in Article 9 and Article 2A, but as to the specific coverage here, Article 2B controls.

Most importantly, under subsection (c)(1), Article 2B governs with respect to goods that are copies of licensed information or software, or documentation related to that subject matter. This is essential to provide consistent coverage of information subject matter. On the other hand, subsection (b)(2)(B) completely excludes most computer programs embedded in products that are not merely a copy of the software.

5. Subsection (b)(2) exclusions. Because Article 2B brings into the UCC a variety of transactions that were previously covered under common law, the broad scope of inclusion has be tempered by the development of specific exclusions. These are brought together in subsection (c).

a. Incidental Licenses. Subsection (b)(2)(A) contains an important limitation. Generally, Article 2B uses a gravaman of the action test which recognizes that different bodies of contract law may apply to different aspects of a transaction. Under this subsection, however, notwithstanding that basic principle, this Article does not apply if the information is merely minor part of or merely incidental to a services contract or otherwise excluded transaction.

The exclusion has two meanings. One refers to information the transfer of which is an 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 second meaning refers to information that is no more than a minor part of a transaction. What is meant here is not simply that the personal services predominate or that obtaining the services was the predominant purpose of the transaction, 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.

b. Patent and Trademark Licenses. Subsection (b)(2)(B) 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

c. Embedded Programs. Subsection (b)(2)(C) excludes computer programs that are embedded in other products and sold as an integral part of the product. 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). On the other hand, the mere fact that a program is embedded or contained in tangible products does not exclude Article 2B coverage.

The exclusion of embedded products does not apply if the program is embedded 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, together with the general principle of the exclusion sets two bright lines at either end of a continuum. Article 2B does not apply to cars, toasters, washing machines and other traditional goods, even if part of the goods consists of embedded software. On the other hand, Article 2B does apply to copies of programs and to software within a computer system (under the gravaman of the action test, of course, Article 2 or 2A applies to the computer system hardware).

Within these two extremes lies an inherently gray area. As modern product are increasingly automated and operated by digital software, it is important to provide guidance on the relative distribution of treatment between this Article and Article 2 or 2A in this gray area. Under the exclusion here, embedded software is covered by Article 2B 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 information processing 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.

d. Core Financial Functions. Subsection (b)(2)(D) 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.

e. Personal Services. Subsection (b)(2)(E) deals with services contracts involving performance of individuals or groups, including employment contracts and entertainment services (e.g., actor, musical group performance, producer, etc.). The excluded cases involve personal services; the area of 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. This subsection also excludes professional services.

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.

6. Formation Rules. Subsection (c)(2) partially addresses an anomaly created by Article 2B contract formation rules and the fact that they validate electronic commerce practices that may not be effective under common law or under current Article 2 or 2A. The subsection applies Article 2B formation rules to the entire transaction if Article 2B subject matter constitutes the predominant purpose of the transaction itself. This allows maximum scope to the contract formation rules and electronic commerce.

7. Opt-In Rules. Subsection (c)(3) allows the parties in a mixed transactions to elect full coverage under either Article 2B or other applicable law. This reflects a specific application of the underlying principle of contract choice that shapes this Article and states a rule that would most likely be applicable in any event under general contract law principles.