This Section was revised based on consultation with the Electronic Transactions Reporter and Committee chair and in light of the discussion of the issues during the February 1998 meeting.

1. General Policy and Scope. This section deals with allocation of loss in cases where one party (either the licensor or the licensee) requires use of an attribution procedure that is commercially unreasonable and use of that procedure causes a loss either because of undetected errors in transmissions or records or because of third party activity in the nature of fraud or otherwise. The Section does not cover all cases in which such loss might occur, but deals only with circumstances in which a party is in a position to and does in fact require use of the commercially unreasonable procedure. A procedure negotiated or jointly selected by the parties, selected from among alternatives that include a commercially reasonable option, or mutually designed, does not fall within this Section. Responsibility for loss in such cases lies outside this article.

a. Reliance Loss. The basic premise is that, all things being otherwise equal, loss in the nature of reliance or restitution should fall on the party that required use of the procedure that caused the loss. This is a contract statute, not a general regulatory or tort liability statute and, thus, the losses to which it applies are limited to situations in which loss results from use of the procedure in a transaction to which the requirement applies.

b. Transactions Not Affected. Additionally, since this entire article deals with licensing and related transactions, the losses are confined to such transactions. The Section does not apply to credit card, funds transfer or other types of transactions in which attribution procedures are used, but which fall outside the scope of Article 2B and, in many cases, are at least partially regulated by federal or other state laws. Thus, for example, use of an identifying code for a credit card payment is not governed by this section. However, if a contracting party requires that the other party use a credit card number as an attribution procedure, credit card law applies as to the payment transaction, but as to the contractual relationship, Section 2B-115 applies if the procedure is regarded as commercially reasonable and this Section applies if the procedure was "required" and is commercially unreasonable.

c. Relationship to Reasonable Procedures. The loss allocation principle expressed in this Section contrasts to the principles stated in Section 2B-116 and 2B-117. Those sections provide the parties with presumptions about the authenticity and accuracy of the electronic records to which the procedures are applied. The presumptions are potentially significant in litigation and planning transactions. As expressed there, the presumptions arise only if the procedure is commercially reasonable. Thus, a commercially reasonable procedure vitiates the presumption, leaving the parties to general proof of content and source of the record. In addition, if the procedure comes within this section, the use of an unreasonable procedure may have an impact on loss allocation.

2. Party Responsible. The section refers to the person that required the procedure as being responsible for the loss. In modern commerce, the person making such requirement is in some cases the licensor and in some cases the licensee. The principle used here applies in either direction. The procedure must, however, be one that the parties have agreed to or adopted. That elements is implicit in the definition of what constitutes an "attribution procedure."

The Section does not necessarily create an affirmative right of recovery. In some cases, the Section merely denies the relying party an ability to recover from the other person. Thus, for example, a licensor acting pursuant to a commercially unreasonable attribution procedure, might ship information product to a third party that used the inadequacies of the procedure to dupe the licensor into believing that the party requesting shipment was the named licensee. If the licensor had required the procedure and the licensee had agreed to it for transactions of this type, this Section allows the licensee to resist any effort by the licensor to charge the licensee for the loss or the contract price. The licensor remains responsible. On the other hand, if the licensee had required the procedure and the licensor agreed to it, the licensor may recover against the licensee for the losses in the nature of reliance. It cannot, of course, in this case seek recovery under contract theory since the licensee did not make the purchase request..

3. Type of Loss, The loss to which this Section applies is limited in several ways.

The loss must, initially, come from use of the procedure. This excludes losses that flow from other, perhaps parallel causes. Thus, if an identifier is unreasonable, but the party actually did engage in the transaction, but suffered loss due to a breach of contract, this section does not apply. The losses addressed here are in the nature of loss from misattribution of who sent a message, tampering with the content of a message, or errors caused by transmission or other factors.

Second, the Section only applies to losses incurred in transactions to which the requirement and use of the procedure between the parties applies. It does not address the difficult problem of liability for the situation where a third party wrongdoer obtains social security or other important identifies of an innocent third party and uses them to fraudulently obtain goods and services from numerous vendors. That issue lies in the realm of tort law, criminal law, and other forms of regulation that are just now beginning to develop. Of course, to the extent that these other sources of law preempt or preclude operation of this section, ordinary preemption rules apply.

Third, the losses do not include lost benefits of the transactional relationship. They are limited to reliance and restitution recovery. In some cases, however, the existence and non-performance of a contractual relationship may allow expectations recovery. The basic premise here, however, is limited to avoiding a shift of losses through a required procedure that fails to protect the interests of the parties.

The emphasis on reliance recovery, of course, places further limitations on the recovery. These are stated in subsection (b)(2) based on a lack of reasonable care and an assumption of risk.

4. Illustrations. The following suggest some applications of this Section.

a. False Identity Cases: No Contract. In many cases where a loss is suffered by a party because a third party fraudulently used an attribution identifier and order information claiming to the appropriate party, this Section produces results that are parallel to the results that could be inferred under other attribution rules of this Article.

Illustration 1. S (the vendor) required and M agreed to a procedure for identifying M in placing orders with S. Thief misuses this procedure and, purporting to be M, obtains a $10,000 electronic encyclopedia from S. S, believing that M placed the order, seeks the license fee from M. Under the general attribution sections, if the procedure is not commercially reasonable, there is no presumption that the sender was M and, since M can prove it was not the sender, it has no liability. Under this section, the required attribution procedure caused a loss, but S is responsible for that loss. It cannot shift loss to M.

In some false identity cases, however, the party demanding the use of the attribution procedure may be responsible for affirmative losses.

Illustration 2. M (the purchaser) requires L to use a procedure under which M identifies itself when placing orders with L. Thief uses the procedure to fraudulently obtain a $10,000 software system from L. Under this Section, since M required use of the procedure and it was commercially unreasonable, the loss suffered may be recovered from M. The amount of loss is measured by reliance, not lost profit. In essence, the recovery is the cost (not license price) of the software shipped to the thief plus related expenses.

b. True Contract: Errors in Performance. In cases where an actual contract exists between the parties and the error or fraud allowed by the unreasonable attribution procedure relates to performance, it will often be the case that contract remedies provide the primary recovery and, under the principle that precludes double recovery, the reliance loss allocation of this does not create affirmative recovery. It nevertheless confirms the placement of ultimate losses in such cases.

Illustration 3. L (licensor) and M (licensee) agree to a license for a $10,000 commercial software license. L requires M to agree to a procedure for sending instructions as to where to transmit the software. M pays the license fee. A third party intervenes and causes misdirection of the software copy. M demands its software. Under this Section, L would bear responsibility for reliance or restitution loss. M can recover the fee it paid. More generally, however, M can enforce the unperformed contract and, in the event of breach, can recover contract damages, including consequential damages, as appropriate.

Illustration 4. In the Illustration 3, assume that M did in fact direct the transmission of the software, but now denies that it did so. If the procedure had been reasonable, L would have the advantage of a presumption of attribution of the message. Since it was not, L must prove that M did send the message without the benefit of a presumption. If it can do so, it can enforce the contract. Under this section, M suffered no loss due to the attribution procedure.

c. Errors in the Offer and Acceptance. The problem of garbled, mis-recorded or otherwise mistaken offers and acceptances is one of long-standing in commercial practice. This Section provides a method of allocating loss in such cases based on the reasonableness of the required procedure and independent of asking arcane questions about what terms were accepted and when,.

Illustration 4. M requires that L use an unreasonable attribution procedure for transmitting orders and acceptances. L agrees and adopts the procedure. It places an order for ten software widgets. Because the procedure is flawed, the message arrives at M requesting 100 software widgets. M ships on that basis. L desires to ship the ninety excess widgets back to M and not pay. One could argue that no contract exists because of mistake. Alternatively, a contract might be formed on the offer as sent or as received. Case law support exists for either result. This section, however, focuses on reliance loss. Either L or M could be said to suffer loss because of reliance on the procedure. Since M required it, M bears responsibility for the loss. It cannot demand the price for the ninety widgets unless, of course, L decides to accept and retain them. If L had required the use of the procedure, it would be responsible for reliance losses and restitution.