Source: None

a. At the 1997 ALI Annual Meeting, the general membership after a brief debate and by a narrow vote, approved a motion that the section on mass market licenses be amended to provide that a term inconsistent with federal copyright law does not become part of a contract under Section 2B-308.

b. At the 1997 NCCUSL Annual Meeting, the Conference adopted by a substantial majority a motion that Article 2B should not deal with federal preemption but should be neutral.

c. Rejected a motion to delete the section and remove it to comments. 9 -3 (September, 1997)

d. Rejected a motion to provide that the Article does not change state common law or competition law rules because Article 2B simply does not deal with these issues. Vote: 2 - 8 (Feb. 1998)

1. General Principle. Article 2B deals with contract law, not federal intellectual property law, competition law, or regulation. The relationship between federal law and state contract law is complex. Ultimately, however, if federal law invalidates a particular contract law rule or its application in a given contract, federal law controls. If federal law precludes a particular contract provision (or its enforcement) in a particular setting, that federal law rule controls. Nothing in Article 2B alters the balance between federal mandates and contract principles.

The basic principle is that federal law controls if it applies and preempts state contract law. When or whether this occurs is not an issue of state law. State law, including the UCC, cannot alter the federal policy result and the balance it may entail and does not intend to do so. Thus, a federal rule that a specific form for disclosure creates an enforceable term cannot be altered by state law. Similarly, a limit on contract liability mandated by federal law cannot be abridged by state contract law expanding that liability. A requirement in federal law that there be a signed writing to transfer a copyright cannot be altered by abolishing a state statute of frauds. A rule that precludes transfer of a licensee's rights under a non-exclusive license without the licensor's consent as a matter of federal law precludes a contrary state law rule.

With the transition from print to digital media, disputes have developed concerning what amounts to a reallocation of rights in light of the fact that the media of distribution allows many different and potentially valuable (for users or authors) uses of information and informational property rights. The difficulty of balancing fundamental rights in this context is demonstrated by the fact that disputes about underlying social policy have been debated and left unresolved in numerous contexts in the U.S. and internationally. These questions are beyond the scope of this Article. State law that conflicts with the resolution of those questions in federal law may be preempted if that is the policy choice made in federal law. Indeed, currently pending in Congress are proposals dealing with these questions specifically as a matter of federal policy.

The approach of Article 2B has been to correspond state law to clear rules of federal law where appropriate and to take no position regarding controversial or context-determined rules whose application cannot be predicted and must of necessity await determinations by individual courts in particular cases or by congress as a general federal policy question.

2. Sources of Preemption. There are many potential sources of preemption. Some preemption questions stem from the fact that many of the property rights that underlie some of the transactions in this area come from federal property rights sources, rather than simply from state property rights law. In copyright, for example, Section 301 of the Copyright Act expressly preempts any state law that creates rights equivalent to copyright. As a matter of fact, this principle is seldom applied to contract terms since a contract deals with the relationship between two parties to an agreement, while property rights contained in the Copyright Act deal with questions of property interests good against persons with whom the property owner has not dealt. In addition to the statutory provision, in some cases, a preemption claim may arise under general constitutional law concepts of the Supremacy Clause or other aspects of the federal constitution. Of course, however, it is important to recognize that Article 2B is not simply an intellectual property rights licensing statute. Many Article 2B transactions do not involve the distribution of intellectual property rights.

Beyond intellectual property law, many situations involving disclosure, access, and transfer of information are subject to federal regulations, such as in Regulation E, the Electronic Communications Privacy Act, the Communications Act of 1996, the Freedom of Information Act, the Food and Drug Administration Act, and various other regulations or statutes. An enumeration of these regulations would be futile and the list would change over time.

The basic theme of preemption is supplemented in licensing law by the fact that federal competition, antitrust, and intellectual property rules also serve to monitor and exclude some contract terms or practices in licensing (i.e., use of particular terms in particular settings can be viewed as abusive). These policies involve questions of federal law and policy that go beyond state law. Article 2B takes no position on the competition, social policy and other issues present here. Indeed, state contract law cannot alter those policy determinations. Article 2B sets out contract principles governing the contractual relationship in information transactions. It governs the contract relationship; federal law and policy determines whether a particular contract in a particular setting is barred by federal law.

3. Nature of the Issues. In determining when such preclusive policies apply, courts accept that contract law generally prevails, but ask whether a particular contract clause in a particular setting conflicts with federal policies when balanced against the general role of contracts in the economy and legal system. How far the federal policies reach is uncertain in many respects. Article 2B approaches the issue from a posture of aggressive neutrality. As with contract law today, Article 2B sets out underlying contract law principles and leaves federal policy determinations to federal courts and federal law.

Not surprisingly, in light of digital technology, defining the proper scope of rights under federal property law has been controversial; it remains unresolved. Some issues deal with reverse engineering copyrighted, but unpatented technology, while others deal with the scope of educational or scientific fair use of digital works. These are questions of federal policy. They must be resolved by courts and Congress, rather than state legislation.

As applied to particular contexts or issues involving contractual relationships, there are two levels of determination in such contexts. One involves whether a contractual term exists and is enforceable as a matter of contract law. The second involves whether that contract term is enforceable under federal law. Article 2B takes no position on the latter question, whether the issue arises under antitrust law, intellectual property law, or other federal source. Article 2B merely provides a contract law framework.

Thus, for example, copyright case law holds that, in certain circumstances, making intermediate copies of copyrighted technology for the purpose of "reverse engineering" and understanding that technology constitutes fair use. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F2d 1510 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., Inc., 975 F2d 832 (Fed. Cir. 1992). The scope of fair use here is not clear and it is also unclear to what extent a contract term alters the analysis. Other doctrines may also apply. For example, the Fifth Circuit has suggested that a reverse engineering clause that in effect attempts to monopolize a different product market constitutes copyright misuse in that particular context. DSC Communications Corp. v. DGI Technologies, Inc., 81 F.3d 597 (5th Cir. 1996). Article 2B does not change the federal policy analysis which applies on a case-by-case basis.

Similarly, there is federal case law (and statutory provisions) which establishes a federal interest in the broad dissemination and use of ideas and concepts that have been distributed to the public. The issues stemming from that policy point in various directions, including concepts of fair use in copyright law and simple but fundamental ideas of free speech. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989). On the other hand, however, it is quite clear that the federal policy on dissemination of information co-exists with concepts about the ability of parties to make confidential disclosures and deal with information that is to be kept secret. See Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F2d 693 (2d Cir. 1992). Exactly where and how these themes interface and what limits they may place on particular contractual relationships is clearly a question of federal policy, rather than state contract law.

On these issues, Article 2B does not alter the relevant policy equation. For example, what would be the result if a term in a widely distributed consumer magazine that purports to prevent a reader of the magazine from using a factual summary or a brief quotation were structured to create a contract? That contract would (in addition to market place resistance) present serious questions of enforceability under copyright and constitutional free speech considerations. By analogy, some case law supports the view that, in some situations involving mass distribution of the information in a generally unrestricted form, such a contractual provision would be unenforceable. See Consumers Union v. General Signal Corp., 724 F.2d 1044 (1983). On the other hand, in other situations, modern law clearly allows the creation of enforceable contract restrictions on the ability of a recipient to reproduce or publicly redistribute confidential information. See Restatement (Third) Unfair Competition.

4. Nature of Contract. Contracts already control most distribution of information. The contract law regime is not created by Article 2B. In most cases and with respect to most issues, contracts control as the method by which parties obtain value from information. While, as stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to the property rights created under copyright, both as a practical and conceptual matter, copyright (or patent) do not generally preclude or preempt contract law. Indeed, contracts are essential to use one's own property, even when the property is tangible, let alone when it is intangible. A contract defines rights between parties to the contract, while a property right creates rights against all the world. They are not equivalent.