SECTION 2B-502. TRANSFER OF PARTY'S INTEREST IN THE ABSENCE OF CONTRACTUAL TERMS ON TRANSFER. In the absence of a contractual term prohibiting or restricting transfers, the following rules apply:

(1) Except as otherwise provided in subsection paragraph (2), a party's contractual rights may be transferred, including by an assignment or through a financier's interest, unless the transfer would materially change the duty of the other party, increase materially increase the burden or risk imposed on the other party, cause a delegation of material performance, disclose or threaten to disclose trade secrets or confidential information of the other party, or impair materially impair the other party's likelihood or expectation of obtaining return performance.

(2) A transfer of a licensee's rights under a nonexclusive license is ineffective unless:

(A) the licensor consents to the transfer; or

(B) the transferee is subject to the terms of the license and:

(i) the non-exclusive license is a mass-market license [with a contract license fee of less than $1,000] under which the licensee has possession of a copy of the information, and the licensee delivers to the transferee or destroys, all copies; or

(ii) the licensee owns the title to the licensed copy , the license does not preclude transfer of the licensee's rights, and the transfer complies with federal copyright law for the owner of a copy to make the transfer.

(3) A transfer made in violation of this section is ineffective.

"Contract": Section 2B-102. "Copy": Section 2B-102. "Financier": Section 2B-102. "Information": Section 2B-102. "License": Section 2B-102. "Mass-market license": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Nonexclusive license": Section 2B-102. "Party": Section 1-201. "Receive": Section 2B-102. "Rights": Section 1-201. "Term": Section 1-201.

a. Voted 7-1 to add a provision to allow transfer when the licensee owns the copy of the information.

b. Voted unanimously to use mass market, rather than consumer in this section.

Notes to this Draft: Edited for clarity. Bracketed language in subsection (2)(B) added in response to concerns by observers and Committee members about removal of dollar limitations in definition of mass market license.

1. Transfers. This section deals with transfers of contract rights where there are no contract provisions dealing with and restricting or permitting transfer. For purposes of this article, "transfer" means a conveyance of rights and duties under a contract. It contrasts to merely delegating performance where the delegator remains responsible and in control of performance. Section 2B-506 deals with delegation of performance or sublicensing. This Section applies in the absence of contractual terms covering these issues. The effect of contract restrictions is treated elsewhere as is the enforceability of a security interest.

While the Section places greater restraints on transfer than exist for contracts governed by Article 2, these restrictions reflect existing common law and federal case law. Overall, especially in reference to a licensee's interest in a non-exclusive license, the Article increases transferability.

2. General Principles. Subsection (a) adopts as a general principle a rule that allows transferability subject to disallowing it when transfer jeopardizes significant interests of the other party to the license contract. This is consistent with Article 2. It is subject to the limits stated in subsection (a) and to the restrictions in subsection (b).

Subsection (a) expressly provides a license is not transferable if transfer would disclose or threaten to disclose trade secret or confidential material of the other party. Whether particular information is confidential or not will be determined by other law, including trade secret law. This limit on transfer requires the existence of confidential material in fact.

The restriction on transfer that results occurs only if the transfer increases the risk of confidentiality disclosure juxtaposed to the original transaction itself. Thus, if trade secrets are embedded in object code of a computer program, merely transferring the copy to another party, if that is otherwise permitted, does not jeopardize the secrets for purposes of subsection (b). With reference to both the transferor and transferee, in the absence of enforceable confidentiality restrictions in the contract or otherwise in law, discovery of the secret information may be appropriate and the degree of risk does not change for the secret owner. On the other hand, where confidential material is subject to being disclosed as a result of the transfer, the limits in (a) apply.

3. Non-exclusive Licenses. Subsection (b) provides that a licensee cannot assign its rights in a nonexclusive license. For patent and copyright licenses, this follows federal policy. See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996); Unarco Indus., Inc. v. Kelley Co., Inc., 465 F.2d 1303 (7th Cir. 1972).

a. Policy Premise. The non-transferability premise flows from the fact that a nonexclusive license is a personal contractual privilege, not creating a property interest. See Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright); In re Alltech Plastics, Inc., 71 B.R. 686 (Bankr. W. D. Tenn. 1987). The Ninth Circuit further explained the policy basis for this federal law rule in reference to patent licenses in the following terms:

Allowing free assignability ...of nonexclusive patent licenses would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee. In essence, every licensee would become a potential competitor with the licensor-patent holder in the market for licenses under the patents.... As a practical matter, [few] patent holders would be willing to grant a license in return for a one-time lump-sum payment, rather than for per-use royalties, if the license could be assigned to a completely different company which might make far greater use of the patented invention than could the original licensee.

Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996). The approach to non-exclusive copyright licenses in federal law is the same. See Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984); . See also In re Patient Education Media, Inc., 210 BR 237 (Bankr. SD NY 1997) (copyright license).

b. Exceptions. The three exceptions in subsection (b) suggest situations in which the basis of this policy are not present. Their net effect is to reduce the scope of the non-transferability rule.

The first exception deals with actual consent to the transfer.

The second exception concerns mass-market licenses. It indicates the fact that in a mass market environment the licensor has essentially chosen not to be concerned about the identity of the particular licensee, but rather places the information out to the general public.

The third exception applies federal law relating to first sales and sets out a default rule that allows the owner of a copy to distribute that copy, presumably along with the right to use/ copy that work in the case of computer software. See 17 USC § 117.

4. Transfer Ineffective. Subsection (d) provides that a transfer of non-exclusive license rights by a licensee that is not authorized by this section is ineffective. Given the carve outs for mass market and owned-copy transactions in subsection (b), this rule carries forward the policy outlined in case such as Everex and reflects the underlying personal nature of the non-exclusive licensee's rights. Cases such as Everex indicate not only that the assignment violates contract provisions, but that it is invalid without the licensor's consent. The Ninth Circuit in Everex indicated that federal law sets out a bright line test invalidating the transfer without consent and entirely independent of whether there was (or was not) actual impact on the licensor's interests. The dominant interest here is the licensor's intellectual property rights.