SECTION 2B-401. WARRANTY AND OBLIGATIONS CONCERNING QUIET ENJOYMENT AND NONINFRINGEMENT.

(a) A licensor of information or informational property rights, other than a financier or the licensor of a patent, which that is a merchant regularly dealing in information or rights of the kind but is not a financier, warrants that the information and rights shall be delivered free of the rightful claim of any third person by way of infringement or the like, but a licensee who that furnishes specifications to the licensor must hold the licensor harmless against any such claim which that arises out of compliance with the specifications [except for claims that result from the failure of the licensor to adopt a noninfringing alternative of which the licensor had reason to know].

(b) A licensor warrants that:

(1) for the duration of the contract, no person holds a claim to or interest in the information that which arose from an act or omission of the licensor, other than a claim by way of infringement or the like, which will interfere with the licensee's enjoyment of its license interest; and

(2) as to rights granted exclusively to the in an exclusive licensee, the informational property rights that are the subject of the license are valid and exclusive within the scope of the license for the information as a whole to the extent the rights are recognized under applicable law.

(c) The warranties in this section are subject to the following:

(1) If informational property rights are subject by law to a right of public use, collective administration, or compulsory licensing, the warranty is subject to those rights.

(2) The warranties obligations under subsections (a) and (b)(2) apply solely to rights arising under the informational property laws of the United States or a State thereof and any other country specifically named in the scope of the license.

(d) A warranty under this section will be excluded or modified only by specific language or by circumstances which give the licensee reason to know that the licensor does not warrant that competing claims do not exist or that the licensor purports to grant only such rights as it may have. In an automated transaction that does not involve review of the record by an individual, language is sufficient if it is specific and conspicuous as to that term. Otherwise, in other transactions, language in a record is sufficient if it language of a type described in Section 2B-307(d)(2) or if it states "There is no warranty of quiet enjoyment or against infringement", or words of similar import.

"Conspicuous": Section 2B-102. "Contract": Section 2B-102. "Financier": Section 2B-102. "Information": Section 2B-102. "Informational property rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Merchant": Section 2B-102. "Person": Section 1-201. "Record": Section 2B-102. "Rights": Section 1-201. "Scope": Section 2B-102. "Term": Section 1-201.

a. Voted to adopt a "reason to know" standard in lieu of "knowledge."

b. Rejected a motion to bar disclaimer in "mass market" contracts.

c. Voted to move the section toward standards applicable under current Article 2. Vote 11- 0.

d. Deleted express exception for conduits with comments to indicate that mere passive transmittal entity is covered in this context. Vote 12 - 0.

1. Non-Infringement Warranty. Subsection (a) contains the affirmative warranty of non-infringement. It is taken from Article 2. The language used here and in Article 2 requires the information to be delivered free of any claim of infringement or the like. This means (1) that, hypothetically, if the information were used and the licensed rights exercised in all of the ways granted by the licensor at the time of delivery, the use would not be subject to a claim of infringement and (2) that the delivery itself does not infringe a third party informational property right which would subject the licensee to liability for receiving that delivery. In the case where no infringement claim exists on this basis, but, for example, a contract grants a three year license when the transferor's rights are limited to two years, the cause of action is for breach of contract, not breach of the infringement warranty. Liability under this warranty accrues based on conditions at the time the copy is delivered.

The basic interpretation of the warranty applied here extends to warranty to warrant noninfringing use. This expands existing Article 2 rules, but gives a more appropriate interpretation of the infringement concept and better protection for the licensee. Compare Motorola, Inc. v. Varo, Inc., 656 F. Supp. 716 (N.D. Tex. 1986).

Illustration 1. To illustrate the nature of this warranty, consider a license of clip art under which the licensor provides a copy of the clip art and conveys to the licensee a right to make derivative works from the clip art and to publicly perform or display the art for any purpose. The warranty requires that the licensor be authorized by the copyright owner to have made the copy it delivered and to distribute that copy. It also requires that the purported license of the derivative work and public display rights give the licensee an actual right to do so without there being an infringement claim. That latter warranty would be tested by asking whether, at the time of delivery, if the licensee had made a derivative work and a public display, these would constitute infringement. They might do so, for example, if the licensor had not itself been authorized to license these rights by the copyright owner.

Since the subsection conforms, except for the bracketed language, to existing Article 2, the comments to existing law, Section 2-312, Comment 3, apply and describe the intended scope and effect of the subsection. The warranty is made only by a person that is a merchant in information of this kind. The "hold harmless" obligation only applies in cases where the infringement arises as a result of compliance with licensee specifications, not because of choices of the licensor in implementing general specifications or goals of the licensee.

2. Non-Infringement and Passive Transmission. The obligation in subsection (a) deals only with licensors of information and applies only within the scope of this Article. It does not apply to persons who merely provide transmission services, even though those services may transmit information from and two other parties. In the area of copyright infringement, the issue of under what circumstances a transmittal entity has liability for infringement is controversial. Article 2B is a contract statute and has no effect on or direct relationship to federal questions about what acts constitute direct or contributory infringement. See 2B-105. This section states an affirmative obligation which, as drafted, creates an implied warranty of non-infringement by licensors of information. This excludes many of the cases where the copyright infringement issue is most difficult. It follows the contract law premise that commitments about the absence of infringing material between two parties to a contract are appropriate in transactions where one party provides information to another, as compared to services contracts that might (or might not) constitute an access contract. Whether, a particular contracting party is a "licensor of information" for contract law, will depend on the circumstances of the contract. It has no bearing on whether a passive transmission provider has liability to the owner of the intellectual property rights.

3. Quiet Enjoyment Warranty. Subsection (b)(1) deals with issues other than intellectual property infringement. The licensor warrants that it will not interfere with the licensee's exercise of rights under the contract. Non-interference represent the essence of the contract. See General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 181 (1938); Spindelfabrik Suessen-Schurr v. Schubert & Salzer, 829 F.2d 1075, 1081 (Fed.Cir.1987), cert. den. 484 U.S. 1063 (1988). This "quiet enjoyment" warranty comes from Article 2A and is to be construed in a manner consistent with that Article. It basically reflects the licensor's implied commitment to not act in a manner that detracts from the rights granted to the licensee for the term of the license by interfering with the licensee's use.

4. Public Domain and Exclusivity Warranty. Subsections (b)(2) deals with two intellectual property risks in exclusive licenses. General intellectual property risks in contracting encompass three different issues:

public domain risk: Whether enforceable rights exist in the information transferred? This asks whether the information is in the public domain and thus useable by anyone with access to it.

exclusivity risk: Whether the transferor has the sole right to the information or whether that right is also held by third parties (e.g., assignees, joint authors or coinventors).

infringement risk: Whether the transferor can convey rights enable the licensee to exercise those rights without infringing third party rights in the technology?

Subsection (a) deals with the infringement risk. Subsection (b)(2) deals with the other two risks. Both of these are relevant only in contracts that purport to give exclusive rights since each focuses on whether the licensor can grant such rights good against all third parties.

Validity corresponds to the public domain risk. It important especially if a licensee relies on the rights transferred to create a product for third parties. The converse of validity is that the information is in the public domain and, thus, can be used or recreated by anyone. See M. Nimmer & D. Nimmer, The Law of Copyright 10.13[A]. See M&A Assoc. v. VCX, 657 F.Supp. 454 (E.D. Mich. 1987), aff'd, 856 F.2d 195 (licensor's failure to place appropriate copyright notices on motion picture violated warranty of title). Validity is not relevant to the ordinary end user license since it does not affect the licensee's right to use the information.

Subsection (b)(2) also deals with exclusivity: the risk that a portion of the rights may be vested in another person. Coequal rights exist where co-authors or co-inventors were involved. Alternatively, the transferor may have executed a prior license to a third party. In either case, while a transfer may convey rights, it may be no more than equal to rights vested in and available for conveyance by the third party co-author. Depending on the underlying agreement, the existence of coequal rights in other parties may have no relevance to the transferee or it may be a critical limit on the licensee's ability to recoup investment.

Exclusivity is an important issue where a licensee undertakes significant investment on the assumption that its rights are exclusive as to other competitors. For non-exclusive licenses, the question of whether intellectual property rights are exclusive in the licensor is insignificant. It does not alter the end user's ability to continue to use the licensed rights without challenge. A license from one co-owner adequately grants rights to the licensee and the dispute would then shift to one between the two co-owners to determine accounting for and distribution of the proceeds f the license.

5. International Issues. Intellectual property rights are territorial in character in that they extend only within the territory of the state that creates them, except as some deference internationally occurs through multi-lateral treaties. Subsection (c)(2) parallels this facet of intellectual property law and provides that the obligations created about exclusivity and infringement extend only within this country and to a country specifically named in the scope of the license. Unless a country is specifically so designated, the assumption is that the licensor and the licensee undertake obligations only with respect t this country.

6. Disclaimer. Article 2B provides for disclaimer of the warranties under this Section based on language from existing Article 2. This requires specific language or circumstances indicating that the warranties are not given. In addition, consistent with the general approach of contract law as a planning tool, illustrative language is provided for purposes of disclaimer.