Article 2B - What is it and why should anyone care?

• The goal of Article 2B is, essentially, to establish a new commercial law for the information economy -- first at the national and then at a global level
• Article 2B is a proposed addition to the Uniform Commercial Code (UCC), a model commercial law that has been adopted by most states. Article 2 of the UCC has for decades provided the framework for contractual relationships involving the sales of goods. As a result, a manufacturer in Virginia who enters into a contract to produce hammers for a distributor in Oregon has been confident that the laws governing the contract in Virginia would be very similar to the corresponding laws in Oregon.
• Article 2B is designed to extend the UCC to contracts for information. Here information includes everything from copyrighted expression, such as stories, computer programs, web pages, and motion pictures; to other traditional forms of intellectual property such as patents, trade secrets, and trademarks; to newer digital creations such as online databases and interactive games. With the exception of computer software, information products have not been considered "goods" because they are intangible. Contracts for information and intellectual property rights have been governed by a combination of general state contract law ("common law" as opposed to statutory law) and federal intellectual property law and not by the UCC.
• Article 2B is important because it seeks to lay the legal ground rules for the new age of electronic commerce. It validates the use of "shrink-wrap" licenses (called "mass market licenses" in the Draft) and lays forth default rules that would underlay licenses for information products in the century to come.

The software industry was the initial focus of this model law and software companies have been a driving force in shaping Article 2B. However many other industries will be affected as the scope of Article 2B extends to nearly all "transactions in information." For example, Article 2B will impact: the music industry, the information technology industry, major public and private libraries, data processing service providers, publishers of statistical data, traditional print publishers, online database providers and you the consumer of information. As the scope of Article 2B has expanded so has the political nature of the debate.

The motion picture, cable and broadcast industries were late comers to the 2B table and when they arrived they were surprised by what they found. They expressed concern that the law outlined in the Draft would not fit with their industry practices. Rather than prolonging consideration of the draft and refining 2B to match better with the broader information industry concerns, the Drafting Committee voted just two weeks ago (meeting March 27-28, 1998) to exclude the core business of these media industries from the scope of Article 2B. See < http://www.SoftwareIndustry.org/issues/guide/mar98rpt.html >. Yet, the Drafters of Article 2B keep insisting that a convergence of the information-related industries is a reason to extend the scope of Article 2B to all information transactions. (See the Reporter's Comments to Article 2B). Perhaps this latest decision to exclude the motion picture, cable and broadcast sectors is an admission on the part of the Drafters that this convergence is not as far along as they have assumed.

A similar "spin-out" occurred for financial service industry which did not find that the Article 2B rules matched its industry practices.

(One has to wonder whether the Drafters have now excluded enough of the opposition to keep the Draft moving forward.)

Copyright Law: Some legal scholars have expressed concern that the vision of state commercial law expressed by Article 2B would, in practice, reduce the influence of federal copyright law or even, as a practical matter, replace copyright law. They assert that such a shift in power between copyright law and contract/license law would endanger consumer protection doctrines such as "fair use" which have been an integral part of the copyright law's balance between the interests of authors and consumers.

The question floating above this discussion is: Does Article 2B expand the power of license agreements to such an extent that information providers will be able to enjoy the benefits of Copyright law (including a 20-year longer copyright term if current legislation is passed) while avoiding the consumer-oriented limits of copyright law? Perhaps "having their cake and eating it too?"

It is unclear how conflicts between contract and copyright law will be resolved. But conflicts are inevitable. For example, if copyright law provides consumers with rights to make backup copies of software or to fix bugs, can a mass-market license prohibiting these acts override these federal rights?

Patent and Trade Secret Law: Article 2B also stands to impact licensing of patents and trade secrets. Although basic patent licenses (except licenses for software patents) are excluded from the scope of 2B, technology licenses that involve patents along with other types of information such as trade secrets are included. In this area of technology licensing, the scope of 2B's coverage remains largely unexplored. A result there may be significant unintended consequences for the development of the technology industry in years to come. Does Article 2B pose a risk to the stream of innovation?

The First Amendment: What if a journalist buys a new software product with the intention of writing a review but the shrink-wrap license prohibits publishing any criticism of the product? Does the First Amendment override the contract in this case? This example gets at the heart of the issue. What is the power of a contract when it slams into a federal law or policy? Should there be some types of license provisions that should be prohibited by Article 2B for this reason? At this point 2B does not state any such prohibitions. (It only prohibits "unconscionable" terms.)

Preemption: There is a constitutionally-based doctrine called preemption that determines when and if a federal law or policy overrides a state-based law. Many of the articles presented at this conference will address how a preemption or related federal policy analysis should be applied to the conflicts that arise under Article 2B. The text of Article 2B takes a "neutral" position on the preemption questions, but some argue that such "neutrality" in essence favors contract law until and unless there is new on-point federal legislation clarifying the scope of each federal policy or there are years of complex litigation to perform such interpretation on a case-by-case basis.

Consumer groups have voiced concern that Article 2B favors software producers and other licensors of information over the concerns of information users. The most volatile aspects of Article 2B from a consumer perspective are:

• the right to "self-help" repossession of licensed software by a software vendor under certain circumstances
• legalization of mass-market licenses ("shrink-wrap" licenses) which are presented to consumers on a "take-it-or-leave-it" basis. (Currently the courts are split on whether terms in such licenses are enforceable)

• the limitation of damage recovery in the event of software defects or failure
• the allowance for "choice of forum" terms that may force licensees to bring lawsuits in the state chosen by the licensor and even if that state is unrelated to the location of the licensee or the transaction itself
• a possible undermining of traditional warranties in commercial contracts

Library associations have also expressed concern that Article 2B will undermine the public policy of making information available to the general public on a shared-use basis. Will libraries be forced to accept pay-per-use licenses for new information products as opposed to the one-time fee format involved with traditional book purchases? How would such a shift impact the ability of local libraries to offer current information to the public?

The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) have been holding meetings on Article 2B for several years. When both ALI and NCCUSL have approved a final version of Article 2B, it will be sent to the state legislatures for consideration. (Nothing actually prevents a state from introducing Article 2B or something like it earlier but most states will wait until both NCCUSL and ALI have approved it.)

The ALI has announced that it will not present Article 2B to its members for a final vote at the ALI annual meeting in May of 1998, but may submit it to a committee vote in the fall. By contrast, NCCUSL plans to vote on Article 2B as a final draft at its meeting of state officials in July of 1998. [There is some tension here as the proponents of 2B seek to persuade ALI to vote on 2B as a final draft sooner rather than later. And there is some question whether a positive vote by NCCUSL will be enough to get state legislatures looking at 2B.]

The Uniform Commercial Code serves not only as a template for U.S. state laws, but for international agreements as well, and its leadership in this relatively uncharted area could have a global impact. The conference will include a panel of international experts reacting to the concerns and ideas raised at the conference.

About the Authors:   Laurel Jamtgaard, a Boalt 1997 graduate working as a fellow to Professor Pamela Samuelson, is a key coordinator of the Article 2B conference in Berkeley.   Kellie Ann Aki Takenaka is a first-year law student at Boalt Hall School of Law.  The opinions expressed are those of the authors and should not be viewed as the opinions of the University of California or any of its departments.