Although it today involves participation by motion picture, broadcast, publishing, banking, online and other industries, Article 2B began with a focus on the contract issues associated with software licensing, covering the entire range of contracts in this industry, including mass market and commercial transaction frameworks.

Under modern copyright law, software and most other digital products are governed by an intellectual property rights regime under which the copyright owner holds the exclusive right to authorize or make copies of the work, distribute copies, engage in public display or performance of the work, and make modifications of the work. This copyright regime (along with other intellectual property rights) creates a property law much different from that associated with goods; it places importance on the contractual terms relating to conveyance or restriction of rights in the subject matter. In this regard, software and other digital products are treated in law more like manuscripts and motion pictures, than television sets and cars. Even though a purchaser acquires a copy of the work, the producer retains rights and control with respect to various uses of the copy. In this regard, many believe that the contract is the product in that it defines what rights the licensee receives and does not receive in a work. A copy of software delivered to a licensee has far different value if the license allows only personal use of the copy as compared to if the license authorizes making and distributing twenty thousand copies, even though in each case the copy may be identical.

This underlying difference in rights coupled with the ease of copying involved in modern digital products causes differences in contracting practices between the information world and the goods world. The differences are enhanced by the development of the Internet and online services since these systems allow transfer of information without using any tangible objects. Indeed, in the modern marketplace, while in many systems the end user has in its own machine all information resources it needs, many new systems use rapid communications capabilities to enable the end user to seamlessly use software located hundreds or thousands of miles away in "cyberspace."

Over several years, committees of NCCUSL, the ABA and other groups examined the consequences of a mismatch in concept between contract law aimed at defining relationships for the sale of goods (Article 2) and contract relationships in which information is the center of the transaction and the contractual format most often is a license, rather than a sale. The conclusion entails two basic observations:

These conclusions were reached through a process of deliberation involving several committees of the National Conference of Commissioners on Uniform State Laws (NCCUSL), discussions in the context of the American Bar Association, and review by numerous other groups.

This project began at the recommendation of an ABA Study Committee that consideration be given to developing uniform law treatment of software contracts, either in or outside the UCC. A subsequent study committee of NCCUSL agreed and proposed a separate article of the UCC for software and related contracts. Shortly after that, however, the software industry objected. A second study committee was appointed. After extensive consultation and review, a Special Committee on Software Contracts was created to work parallel to the Drafting Committee on Article 2 Sales. This Special Committee was later folded into the Article 2 Committee.

The Article 2 Drafting Committee concluded that an appropriate approach would be to develop a "hub and spoke" configuration for Article 2 under which licensing and sales would be treated in separate chapters of revised Article 2, both chapters being subject to general contract law principles stated in the "hub" of the revised article.

During this period, information industry groups reversed their position in light of developments in the online and other areas, and the increasing gap between contracts dealing with this subject matter and contracts that deal with goods (either by lease or sale). They concluded that treatment of the contracts affecting their industries within the UCC was appropriate and desirable as a means of standardizing practice and providing a roadmap for the areas of contracting that are springing up in the modern information economy. The industry, however, advocated a separate UCC article on licensing because the unique character of the transactions merited separate treatment and separation would make the process of moving forward.

In July, 1995, the Executive Committee of NCCUSL concluded that the appropriate approach was to develop an article of the UCC dealing with licensing and other transactions involving information. This decision and the events that preceded it reflect an awakening to the fact that the modern economy and commerce within it no longer depends solely or primarily on sales of goods. Additionally, the decision involves a recognition that information and other license contracts entail far different commercial and practical considerations than can be addressed within a sale of goods model.

From the outset, the Article 2B process has reached out for the widest range of input and commentary possible. To a greater extent than in any other recent UCC project, this has led to an active engagement of the views of many different groups and individuals. During the period of from March, 1994 through today, the Reporter, the Chair, and various members of the Committee have met with a wide range of groups to review provisions of various interim drafts. More than sixty organizations have been represented at Drafting Committee meetings. Drafting Committee meetings are routinely attended by around one hundred lawyers from practice and public interest groups. Drafts of Article 2B have been discussed at over 200 seminars and public meetings; a large number of individual attorneys have provided written commentary on draft provisions.

A paradigmatic transaction involves a license, rather than a sale. The transaction is characterized by 1) the conditional nature of the rights or privileges conveyed, and 2) the focus on information, rather than tangible property with reference to both the value conveyed and the restrictions imposed. A license is not a lease or a sale. Both of those terms apply to transfers in goods, rather than rights in information. The Supreme Court described a patent license as "a mere waiver of the right to sue." The Federal Circuit Court of Appeals stated:

Many licenses regulate rights in intellectual property. There are many other situations, however, in which a license occurs in the absence of intellectual property. For example, a license also exists in situations in which one party receives permission to enter the physical premises or computer of another or where property owned by the licensor is made available to the licensee. That model exists in the digital world in transactions in which parties are licensed to access computer or other information resources of a licensor. In Article 2B, that is described as an "access contract" which, as to rights to access a facility. Section 2B-102 defines such contracts as a contract "for electronic access to a resource containing information, resource for processing information, data system, or other similar facility of a licensor, licensee, or third party." These are contracts for online access and services. The focus centers on licensed access to a resource or facility. This relationship creates various ongoing obligations (e.g., the obligation to pay per access, the obligation to maintain accessibility) not present in other licenses.

Licenses are commercial transactions that are common in modern commerce. Licensing is a dominant means of commerce in digital information and in commercial information transactions. Typically, as a simple matter of contract law, license restrictions are enforceable even though their terms do not mirror the "exclusive rights" in copyright or patent law. Indeed, while many courts use Article 2 to resolve contract disputes in software, Article 2 has never been applied to determine the effectiveness of use restrictions. Courts consistently apply licensing law paradigms to software and online contracts where the issues involve enforcing restrictions on use of information.

Courts generally enforce contract terms unless a specific term in a particular context conflicts with federal antitrust or related doctrines of patent or copyright misuse. Thus, courts have enforced license restrictions precluding non-commercial use of a digital database, limiting a right to access by barring the making of a copy of software, limiting use of software to a specific computer, limiting use to internal operations of the licensee, restricting redistribution to a particular clusters of software and hardware, precluding modification of a computer game, and various other contract limitations. Article 2B does not create contract law here – contracts have long been used to control distributions. Article 2B merely provides a more coherent and workable basis for contract issues.

As in transactions in goods, licensing spans a wide range of commercial practices. Article 2B focuses on many of the most commercially important transactions in modern commerce. For purposes of illustration, it is useful to distinguish various types of licensing.

One element drawing a distinction differentiates between licenses that relate to copies of information physically transferred to a licensee, as contrasted to licenses that enable a licensee to access a location (i.e. a computer) in which information resides. The latter are used widely in Internet and online transactions.

In transactions in which copies are made available on diskette or otherwise to a licensee subject to licensed conditions, a variety of transactional formats exist. In some, a licensor deals directly with the end user. In others, a chain of distribution intervenes and the copyright owner does not deal directly with the end user. In each case, the basis of the license resides in either the existence of intellectual property rights in the information or, more simply, the fact that the licensor has control over a source of the information that the licensee desires to utilize.

In areas covered by Article 2B, copyright law is a dominant (but not sole) source of intellectual property rights. It gives the copyright owner the exclusive right to make copies of its work, to distribute copies, to make derivative works, to publicly display or perform the work, and other rights. A basic choice made by a copyright owner is whether to license or to sell a copy of its work. In book publishing and most records, in current practice in the mass market, copies are sold. In the motion picture industry, licensing is the common approach in reference to theaters who publicly perform the movies, while in the consumer market, copies are either sold or leased (with a license that precludes public performance) for a brief time. Software is typically licensed, although computer game distribution frequently involves sales of copies.

One method of distribution occurs when the copyright owner (or its agent) contracts directly with the licensee. This is common in markets involving software for large or complex computer systems and databases with significant commercial value and cost per use. It is also characteristic of licensing in the publishing and entertainment industries. In the software industry, direct licenses (commonly in standard form agreements) may transfer of a copy of the software to the licensee subject to express contractual restrictions on use. Increasingly, rather than on a disk, copies are moved to the licensee's site electronically. In the near future, an additional licensing format will involve not delivery of software, but licensed access to and use of elements of software for brief periods as needed. Even today, in many license relationships, data is transferred from the licensee to the licensor, who utilizes its own software and systems for processing, examining and otherwise handling the licensee's data.

Common, but not necessarily uniform contract terms limit use to a designated system, for specific purposes (e.g., internal use only), subject to confidentiality conditions, transferability limitations, and similar restrictions applicable to the commercial deal. A central element of this distribution method is to recognize that cases uniformly hold that loading software into a computer and, even, moving it automatically from one part of memory to another part, constitutes making a copy of the software that falls within the copyright owner's exclusive rights.

Direct licensing also involves many contractual relationships in which information (software, text, movies) is developed for the licensee. Here, it is common for smaller companies or individuals to be licensors with large corporate licensees. This, of course, illustrates an important point in the overall mix of rights and contract issues. While large software providers are important factors as licensors, the overall software industry consists of large numbers of small licensors. This is equally clear in entertainment and publishing venues.

As in other areas, commercial licensing also occurs in context of broader distribution and utilizes distribution chains. These are not analogous to distribution chains employed in the sale of goods marketplace because of the intangible subject matter and the overlay of intellectual property rights which include the exclusive right to distribute copies. While it greatly over-simplifies the matter, it is useful to discuss two distinct frameworks.

The first involves use of a master copy and is common in the movie industry and in software contracts. In this framework, a "distributor" receives access to a single master copy of the information work and a license to make and distribute additional copies or to make and publicly perform a copy. For example, Correl Software may license a distributor to allow its software to be loaded into the distributor's computers or video games. The contract will contain a number of terms. Correl may limit the distributor to no more than 1,000 to be distributed only in the computers and only if subject to an end user license. Since both the making of copies and the distribution of copies are within the scope of the owner's copyright, acts that go outside the contractual limitations are infringements as well as contractual breaches.

An alternative methodology uses actual copies of the software. Here, for example, Quicken may license a distributor to distribute its accounting software in packages provided to the distributor by Quicken. A license is used in the software industry here, although some other industries may sell copies to the distributor for resale. In the license, the distributor may be allowed to distribute copies to retailers, provided that certain conditions are met, such as terms of payment, retention of the original packaging, and making the eventual end user distribution occur subject to an end user license. Since the distribution right is an exclusive right in copyright law, distributions outside the license infringe the copyright.

In both sequences, the information product eventually reaches an end user. If it does so in an ordinary chain of distribution complying with the distribution licenses, the end user is in rightful possession of a copy. If the distribution involved sales of copies, nothing more is required. The end user is the owner of the copy. Copyright law spells out limited rights that flow to the owner of the copy (e.g., to transfer it, make a back-up if it is software, make some changes essential to use if its software). There is no direct contractual relationship between the copyright owner and the "end user."

If, however, the copyright owner elected a licensing framework, given the structure of the transactions, the end user's right to "use" (e.g., copy) the software depends on the end user license. Typically, this is characterized as a license from the producer to the end user. It creates a direct contractual relationship that would not otherwise exist and which, in light of concepts of privity, might not be implied as between these parties. The contract, then, at this point, jumps past the chain of distribution and creates a direct link to the producer by the end user. It is also, in this sequence, the only contract that enables the end user to make copies of the software in its own machine.

The fundamental philosophy of Article 2B supports contractual choice and commercial expansion in information contracting. In addition, an important theme involves the need to create and preserve as broad as possible a field for expression and communication, commercially and otherwise, of ideas, images, and facts; material that this Article refers to as "informational content."

The convergence of technology and the evolution of the information age entails a fundamental shift in our society and in how people interact, trade and establish commercial relationships. Informational content, which consists of sights, sounds, text, and images that are communicated to people, has become important commercially. That importance does not diminish its political or social role. The technology, however, does change how informational content is distributed and enhances the importance of direct contracts in that distribution.

As contract rules evolve, basic First Amendment and other policies to encourage vibrant discourse must remain central to how law approaches this new era. Even as informational content becomes a significant commercial commodity, we must not forget that informational content and its communication in a marketplace of ideas remains equally relevant to political and social norms in this country. What we do here affects not only the commercialization of information, but also the social values its distribution has always had in this society.

The thought that informational content becomes something entirely different if the provider or author distributes it commercially can hardly be a premise. Commercialization (that is controlling who receives the information or charging a fee for its receipt) is not inconsistent with the role of information in political, social and other venues of modern culture. If it were, newspapers, books, television, motion pictures, video games, and other modern sources of informational content for the general public or for specialized groups could not exist. How contract law, embodied in Article 2B creates (or precludes) liability risk, allows (or precludes) authors to control distribution of their works, or allows (or denies) the right to contract for licenses of information has a significant impact on the future of information in new, and in older, systems of distribution.

These underlying values argue strongly for an approach to contract law in this field that does not encumber, but supports incentives for distribution of information and its distribution. That theme permeates this draft.

The philosophy in UCC provisions on commercial law builds on two basic assumptions about commercial contract law. The first commercial law theme assumes that a role of contract law is to preserve freedom of contract. This permeates the UCC: "This article was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract... These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care."

The idea of contract flexibility is embedded in general contract law theory. The idea that parties are free to choose terms can be justified in a number of ways. It leads to a preference for laws that provide background rules, playing a default or gap-filling function in a contract relationship. A default rule applies if the parties do not agree to the contrary. A default rule should mesh with expected or conventional practice in a manner that projects a favorable impact (as judged by relevant policy) on contracting and that can be varied by the contracting parties. This is in contrast with rules that dictate terms and regulate behavior. As a matter of practice, default rules are common in commercial contexts, while consumer law contains many regulatory rules.

A White Report on global commerce in information strongly indorsed the non-regulatory and contract freedom approach taken in U.S. law and in Article 2B as the primary methodology for allocating rights and risks in the information economy.

The second commercial law premise defines codification as a means to facilitate commercial practice. This is approached in this draft by an effort to identify existing patterns of commercial practice and to follow a presumption that the goal of the drafting is to identify, clarify and, where needed, validate existing patterns of contracting to the extent that these are not inconsistent with modern social policy. Grant Gilmore expressed this in the following terms:

To be accurate and not original refers to commercial practice as an appropriate standard for gauging appropriate contract law unless a clear countervailing policy indicates to the contrary or the contractual arrangement threatens injury to third-party interests which social policy desires to protect. Uniform contract laws do not regulate practice. They sustain and facilitate it. The benefits of codification lie in defining principles consistent with commercial practice which can be relied on and are readily discernible and understandable to commercial parties.

In our context, the best source of substantive default rules lies not in a theoretical model, but in a reference to commercial and trade practice. This is not simple faith in empirical sources for commercial law. It stems from the reality that, even though we may not know how law interacts with contract practice, decisions about contract law will continue to be made. In those decisions, we should refer for guidance to the accumulation of practical choices made in actual transactions. The goal is a congruence between legal premise and commercial practice so that transactions adopted by commercial parties achieve commercially intended results. Background rules tied to the ordinary, but actual commercial context tend both to provide a legal base that falls within the tacit expectations of the parties and to ameliorate problems from lack of knowledge by supplying common sense outcomes.

Yet, transactions range from a casual deal between two individuals at a garage sale to transactions between sophisticated businesses employing multiple lawyers and affecting billions of dollars of business. The approach needed is not to draft rules that an individual party would draft tailored to each case, but to select an intermediate or ordinary framework whose contours are appropriate, but whose terms will be altered in the more sophisticated environments. UCC articles design default rules that are acceptable in ordinary transactions where they can be frequently used without disruption or costly negotiation.

Many, but not all of the informational subject matter used in commerce has protection under federal intellectual property law. In most cases, patent and copyright law do not alter state contract law; they coexist with it. Article 2B does not create contract law in this field. For many years, owners of intellectual property have contracted for selective distribution of their property and placed limits on contracted-for use. Licensing law reflects this broad and long-standing contract practice and generally enforces contract options, subject only to specific restrictions in federal property law, to antitrust-related restrictions on some contracts in some settings, and in some limited types of claims or contexts, to over-riding mandatory federal policies.

As stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to property rights created under copyright. But as both a practical and a 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 agreement, while a property right creates rights against all the world. They are not equivalent.

Important issues exist here. Federal intellectual property law, as well as other federal law and regulation, place some specific, existing, and recognized limits on contract. These include restrictions on transferability, recording requirements in some cases, a statute of frauds concept, and enforceability of property rights against good faith purchasers. A state law developed in context of these specific and existing rules cannot ignore them. While state commercial law themes might prefer a rule that a secured creditor can create and enforce a creditor's interest in a licensee's rights, federal law precludes any transfer of a licensee's rights in a non-exclusive license without the licensor's consent. A default rule that ignores this preemptive provision creates true traps for the unwary. In this draft, they are avoided insofar as possible, although in several situations, there are provisions that push against explicit federal rules insofar as reasonably possible.

This interaction of state law and specific federal yields default rules that, in some cases, do not correspond to the treatment of analogous issues in other parts of the UCC. This is true, for example, with respect to the transferability of a licensee's interest in a non-exclusive license. Federal law reflected in a series of cases holds that the licensee's interest is not transferable without the licensor's consent. Similarly, in patent and copyright law, no concept of good faith purchaser exists against a claim of infringement; this principle limits the ability of a party taking outside of the terms of a license to claim insulation from infringement and other property claims based on making or retaining unauthorized copies or uses.

These provisions reflect a policy of correspondence of rules in addition to simple recognition that federal law preempts contrary state law. There are other situations where federal law and policy shapes contract law and practice, but the nature of that role is less clear and more controversial. Article 2B adopts a position of neutrality on such issues, leaving them to be determined under federal law.

This occurs primarily in respect to federal policies managing competition under antitrust and similar theories of intellectual property misuse and to the application of federal policy about the availability of publicly distributed information for fair use and public domain applications. Typically, in determining whether or when such 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 remains in dispute. Not surprisingly, in light of the transformations and economic shifts yielded by digital information technology, defining the proper scope of rights as a matter of federal property law has been controversial; it remains unresolved despite extensive periods of negotiation and political discussion. The disputed issues are questions of federal law and policy. They must be resolved by courts and Congress, rather than through state legislation. Article 2B takes no position on these policy questions, but merely provides a generic contract law framework to augment and bring to modern form the existing complex network of common law, code and general industry practice.

In the political process that surrounds any new law, many public statements have been made about the effect of Article 2B on consumer issues. Most are political positioning. The truth is that Article 2B adopts a policy of retaining current UCC consumer protections, preserving existing non-UCC consumer laws, and creating new protections focused on the digital transaction environment. When contrasted to law on information assets, Article 2B expands consumer protection. Nevertheless, as with Article 2, Article 2B is a commercial statute and its primary focus is not on the creation of a consumer protection code.

The following chart indicates the relevant comparison in reference to consumer protection law.