Memo from HBO Stating Objections to UCC 2B
[This memo appears to have been written in early 1998. It refers to the upcoming meeting in July 1998.]
UCC Article 2B is a proposed addition to the Uniform Commercial Code setting forth rules as to the formation, interpretation and enforcement of agreements relating to software and licenses of information. If enacted by the States, it promises to have a wide ranging and in some ways revolutionary effect on the way software and information industries conduct their business. A current draft of the legislation, commentary and status reports can be found at "www.softwareindustry.org/issues/guide/".
II. Current Status
The Nation Conference of Commissioners on Uniform State Laws ("NCCUSL"), the entity that has seen fit to put forward UCC Article 2B (hereafter, the "Act"), will present this draft legislation for review and approval by its Committee of the Whole at the NCCUSL Annual Meeting in Cleveland July 24-31 of this year. A one day, pre-meeting drafting session is scheduled for July 23 at the same location. Following the NCCUSL Annual Meeting, there will be a period extending to October 10, during which written comments on the current (June 1, 1998) draft will be accepted in anticipation of a final, open drafting session November 13-15. As revised, if at all, at this November session, the Act will then be presented to the American Law Institute for executive (Dec. 1998) and Membership (May, 1999) approval and then be placed before the 1999 NCCUSL Annual Meeting for final Committee of the States approval and forwarding to State legislatures for enactment. While the Act is clearly being pushed forward vigorously by NCCUSL, many of its provisions are in flux and the open nature of the drafting process still presents an opportunity for interested parties to shape its contents.
III. Origins and Influences
The Act had its origins in proposals from the software industry to amend current UCC Article 2 (relating to the sale of goods) to address software licensing issues and electronic commerce. While first envisioned as a means to sanction such practices as "shrink wrap" licensing and "double click" contracting via the Internet, the proposed Article 2 revisions gradually took on a life of their own. It was decided to split off the software and electronic transaction provisions into a new and separate article of the Uniform Commercial Code. This new article, UCC Article 2B, once set on its own trajectory, grew from its original limited purposes into a vastly more ambitious attempt to codify not only the law of software contracts but all agreements for the licensing of "information." The Act's current shape and many of its difficulties reflect this movement from limited, industry specific and sale of goods-related concepts into general rules with wide ranging and often unintended effects. In seeking to understand the innovative and often unexpected provisions of the Act, it is helpful to keep in mind that the forces behind its development are often result-oriented and parochial to the industry groups that to date have been most strongly represented in its drafting.
IV. Problems Resolved
Since the Act's drafters began their attempt to put the Act in final form for submission to the States, a number of significant problem areas within the Act have been satisfactorily resolved. Taking the February 1998 draft as a starting point, the following matters have been reformulated to conform more closely with current law and practice:
Traditional rules of construction for open terms have replaced the presumption that when a license of information is formed by conduct, the licensor's definition of the scope of the license prevails over the conflicting terms proposed by a licensee (Section 2B-209).
b. Perpetual Contractual Use Restrictions.
Provisions that made contractual use restrictions on licensed information perpetual despite the cancellation or termination of the license agreement creating them have been modified so that elements of such restrictions can be eliminated by the licensee's return of copies containing the relevant information. Despite this correction, other aspects of the Act's treatment of restrictions on licensed information remain troublesome (see discussion of Section 2B-625(b), Section 2B-702 and Section 2B-715 below).
c. Waiver of Warranty by Inspection.
A licensee's reasonable opportunity to inspect information no longer operates to create a waiver of the licensor's implied warranty that the use of such licensed information will not infringe upon third party rights.
d. Anticipatory Repudiation, Force Majeure and Specific Performance.
The Act's criteria for finding anticipatory repudiation (Section 2B-621), an occurrence of Force Majeure (Section 2B-624) and the availability of specific performance (Section 2B-711) have been revised to conform to existing law.
e. Consequential Damages.
The availability of consequential damages under Section 2B-707 is no longer conditioned upon such damages being found "reasonably proportionate" to the assumed risk, with such condition of proportionality being returned to its customary role as but one of a number of determining factors. Significant issues remain, however, as to the availability of consequential damages for injuries relating to "published informational content" (see discussion of Section 2B-707(d)(i) below).
f. Financing and Transfers.
Part 5 of the Act regarding permitted transfers and securitization of licensed information has been substantially redrafted to conform with revised UCC Article 9 and current practices in the information industry. A number of matters in this area nonetheless continue to require clarification (see discussion of Financings below.)
V. Matters in Flux.
Despite NCCUSL's offering of the June 1st draft as a "fixed and final" version for presentation at its July Annual Meeting, at least two crucial provisions of the Act remain in the hands of special drafting committees whose recommendations may not be available until immediately prior to the July vote on the Act. These provisions include:
Section 2B-103 and Section 2B-104, which set forth the crucial matter of the breadth of the Act's proposed application, remain mired in controversy, with alternate proposals ranging from a radical carveback to the original, core matters of computer programs and rules for electronic offer and acceptance to the opposite extreme of an all-encompassing scope covering virtually the entire range of transactions in information. Specific industry exclusions now appear unlikely, with the ALI proposal to limit the Act to "electronic transactions" also likely to be ignored in favor of a broad spectrum approach.
b. Electronic Self-Help.
Specific provisions as to the availability and limits on electronic self-help in the event of breach of contract (former Section 2B-716) remain hotly disputed and it is uncertain whether and in what form they may reappear at the time of the Act's presentation in July.
VI. Major Issues.
The major issues surrounding the Act may be seen as falling into three categories: (a) broad social policy concerns, (b) overbreadth and structure, and (c) specific problems in statutory language and policy. While each of these categories is discussed below, given the extensive public debate already ongoing as to the social policy concerns at the heart of the Act, the major analytical focus of this paper will be on specific problems of importance to transactional lawyers and their clients.
VII. Social Policy Concerns.
Much has been written (see "Legally Speaking: Does Information Really Want To Be Licensed? by Pamela Samuelson, available at http://sims.berkeley.edu/~pam/papers/acm_2B.html) about the chilling effects the Act may have in creating a private law of copyright pursuant to which contractual use restrictions (see discussion below) may be used to extinguish vital rights of fair use currently protected by the federal copyright regime. Taken at its most extreme application, the Act may be seen as enabling a new legal framework of property rights in which the "first sale" doctrine is eliminated and all information, whether disseminated orally, electronically or in print, is made subject to stringent proprietary restrictions and a potentially bewildering web of legal obligations.
b. Preemption .
Given the Act's status as state legislation that arguably encroaches upon matters central to the federal law of copyright, a number of critics forcefully raise the spectre of extensive, prolonged and repetitive litigation to resolve the issues of federal preemption so strikingly finessed by Section 2B-105(a) of the Act. Perhaps most troubling in this regard is the possibility of differing state decisions finding partial preemptions within what are intended to be a complex and interlocking system of rules, with a resulting confusion for practitioners and drag on a vital area of commerce.
c. Contracts of Adhesion.
Because of its enabling of "shrink-wrap" and "click-wrap" licensing in the consumer context and its extremely aggressive formation rules, the Act has been characterized by some as a "Trojan Horse" through which dominant software providers will stifle competition through the elimination of reverse engineering and impose onerous terms on unsuspecting users.
VIII. Overbreadth and Structure .
Assuming that the Act continues to embrace a broadly defined "scope" of application, it will have grown from its core purpose of sanctioning certain specific needs of computer software and database providers into an overall regime for information licensing, neither sought after nor familiar to other "information" providers such as the motion picture, television, recording, magazine and newspaper industries. Many within these more "traditional" information industries have suggested that the better approach may be to solve these core problems on a discrete, incremental basis, rather than through a scheme of general rules, which because of their breadth, threaten to create disruption, uncertainty and unanticipated results when applied to broader industry contexts.
b. The "Sale of Goods" Model.
In aspiring to set forth an overall code for information licensing, the Act has embraced the broad scheme of existing Article 2. While in some ways a convenient model, Article 2 by its very nature as a regime for the sale of tangible, fungible goods is ill-adapted to the dynamic and still evolving world of electronic commerce and information. It is ironic that while much lip-service has been paid by the Act's proponents to the need for rules to accommodate "digital convergence" in a 21st century electronic marketplace, they have chosen instead to harness this new marketplace to a legal framework shaped by a 19th century vision for the purchase and sale of carload lots of widgets. Many of the specific problem areas relating to contract performance discussed below arise directly from this misfit between rules for the sale of tangible, fungible goods and the far more complex issues arising from the creation, dissemination and exploitation of ideas.
IX. Specific Problem Areas.
In addition to and often as a direct result of the more general, structural concerns discussed above, the Act as presently drafted embodies a substantial number of specific problems, which will make it more difficult for those seeking to advise clients on the status and outcome of information transactions. Many of these problems arise from either overbroad language or the unforeseen consequences of utilizing general rules to produce specific pro-software industry results. The most pressing of these specific issues are set forth below:
i. Software Contracts / Licenses of Information. The Act seeks to include within its scope "any transaction that creates a software contract, access contract or license" 2B-103(a)(1)). "Licenses" are very broadly defined to include contracts as to the use of or access to "information" (see 2B-102(28)) other than agreements for the outright sale of all interests in such information. "Information" includes "data, text, images, sounds, and works of authorship..." (2B-102(24)).
ii. Exclusions. Specifically excluded from the Act are transactions "to the extent" that they relate to trademarks, patents, goods, banking, employment and services. As to "mixed" agreements that involve both included and excluded matters, the Act envisions a parsing of controlling law whereby existing contractual regimes would control the interpretation and effect of those portions of the agreement excluded from the Act's reach, while the Act would dictate the rules for the remainder. Whether any coherent method for applying such "split" regimes can operate in practice remains a haunting central issue for the Act as a whole. This conceptual difficulty can be seen clearly in the rules proposed to govern which body of law controls the formation of such "mixed" agreements. The Act currently proposes that a "predominant purpose" test apply (2B-103(b)(3)), a strikingly vague standard, especially in light of the Act's aggressive formation provisions as set forth in Part 2.
iii. Opting In or Out. Perhaps in recognition of the difficulty and confusion surrounding scope of application issues in "mixed" transactions, the Act provides that except as to certain consumer protections or matters wholly within Article 2 or Article 2A the parties to a "mixed" agreement may opt into or out of the Act with respect to the entire transaction (2B-103(c)).
iv. Confusion in Application. Although, as noted above, the Act's definition of scope remains in flux, the language currently included in the June draft appears overbroad even in the context of the Act's most ambitious declaration of purpose. This overbreadth arises from the confusing formulation in Section 2B-103(a)(i) and Section 2B-103(b), wherein the former provision sweeps within the Article, "any transaction that creates a software contract, access contract or license...", while the latter sets out a series of limiting exceptions that apply where the Act governs part of a transaction and "other contract law governs" another part. Since Section 2B-103(a) includes within the Act the entirety of any transaction that encompasses within it a software contract, access contract or license, no such transaction can fall within the mixed law exceptions in Section 2B-103(b). Assuming this circularity is unintended, and that the inclusion of a "software contract," "access contract" or "license" is not intended to cause the entirety of the transaction of which they are a part to become subject to the Act, the language in these two sections must be revised so that this is more clearly expressed. A similar confusion arises from the use of the "predominant purpose" test under Section 2B-103(b)(3)(B) in determining which body of law governs the formation of such "mixed transactions", since this test, while easily stated in theory, creates substantial uncertainty in practice. This uncertainty is especially bothersome given the extremely aggressive formation rules for the Act (discussed in greater detail below). It is suggested that a much more preferable approach would be to provide that in "mixed" transactions the "predominant purpose" test default to the Act's formation rules solely where contract formation occurs entirely by electronic means, as opposed to by traditional, oral or written negotiations.
v. Incidental Licenses. Many of the specified exclusions from the Act's scope set forth in Section 2B-104 are either confused or unclear. Section 2B-104(1), for instance, appears designed to provide that the Act does not apply to a transaction to the extent such transaction is not a software contract, access contract or license, where any software contract, access contract or license that is a part of such transaction is only incidental to its preponderant, uncovered subject matter. If so, the Act's language in the section should be reformulated to state this rule directly.
vi. Embedded Computer Programs. The solution proposed to the problem of whether Article 2 or Article 2B will control as to a sale or lease of goods in which a computer program is "embedded" also seems unwieldy when applied to any particular product since, as set forth in section 2B-104(3)(C), it turns upon whether "giving the purchaser access to or use of the computer program is a material purpose of the transaction." One can well argue that if a computer chip in a toaster controls whether your bread is warmed or incinerated, access to such a computer program is a "material purpose" for one's purchase. If so, the Act now appears to include within its reach a vast realm of home appliances whose manufacturers, distributors and financiers are, like many in the communications industry, in for an unpleasant surprise.
vii. Industry exclusions. Should the television and motion picture industry exclusions survive, the language excepting them continues to require clarification. Thus, Section 2B-104(6) should specify whether the excepted licenses for "audio or video programming by broadcast or cable" are intended to include solely licenses to acquire such programming, solely licenses to distribute such programming or both. Similarly, if it is the Act's intention not to include under the Act the licensing of linear motion pictures or sound recordings, Section 2B-104(8) needs to be reworked, since as presently drafted it would, despite its stated exclusion, still include much of such licensing under the category of "access contracts" because such defined term can be seen to include virtually all forms of satellite and cable delivery of such programming.
b. Freedom of Contract
It should be kept in mind while considering the various formation, warranty, performance and remedies provisions of the Act described below that except for a dozen or so specifically cited provisions, the parties to a particular agreement may vary any provision, allocation of risk, or imposition of burden the Act sets forth (see Section 2B-106). The ability so to vary the Act, however, is itself controlled by the Act's provisions as to formation and interpretation, which in the absence of the parties' agreement expressly addressing an issue, call into play the Act's aggressive "default" mechanisms.
c. Formation .
i. "Authentication". By substituting "authentication" for the traditional signature as a means by which a party is bound to an agreement or a term of an agreement and then including within the meaning of "authenticate" a wide range of vaguely defined actions ("to sign or otherwise to execute or adopt a symbol or sound, or encrypt or similarly process a record in whole or part with intent of the authenticating person to ... adopt or accept the terms or a particular term of a record that includes or is logically associated or linked with the authentication or to which a record containing the authentication refers"! see Section 2B-102(3)), the Act creates immense confusion as to how and when a party becomes aware of or bound to a contractual obligation. This is made worse by including within the matters deemed "authenticated", and hence agreed to, terms "logically associated or linked with" the terms actually a part of the record adopted. A parallel muddle arises under the provision in Section 2B-111(a) that one can be found to have "manifested assent" to a record or term through authentication without having ever actually read such record or term so long as such record or term is made available in a manner that "ought to call to it the attention of a reasonable person" (see also Section 2B-112 (a)(i)). Yet further confusion is added to the analysis of when authentication, and hence manifestation of assent, has occurred by the fact that pursuant to Section 2B-116(a)(2) one can be deemed to have authenticated a record or term without actually having taken any action at all, so long as the person believing it has received such putative authentication utilized "a commercially reasonable attribution procedure" pursuant to which it "reasonably concluded" that such action was that of the alleged initiator. While the Act provides elsewhere that such a deemed attribution merely creates a presumption of authentication, it then goes on to state that even if such presumption is later rebutted by the alleged authenticator, the alleged authenticator may still be held liable for the other party's intervening reliance damages. (Section 2B-116(c)) Query also, how such a deemed attribution of authentication under Section 2B-116(a)(2) relates to the provision in Section 2B-119(b) that "compliance with a commercially reasonable attribution procedure for authenticating a record authenticates a record as a matter of law?"
ii. Manifesting Assent. Just as the looseness of what constitutes the "authentication" of a record or term under the Act undermines the certainty of contract formation, the conduct-based alternate method for finding a party has "manifested assent" and hence become bound to such a record or term under Section 2B-111(a)(2) may operate to bind a party under the Act to terms of an agreement which it has never actually seen nor intended to engage in. Such an unintended result would arise where the particular party "engages in affirmative conduct...that the record [allegedly agreed to] conspicuously provides, or the circumstances including the terms of the record clearly indicates, will constitute acceptance...". Under this formulation, so long as a record or term has been made available to a party in a manner that ought to call it to the attention of a reasonable person and the terms so made available set forth an act of conduct constituting assent, a party that has chosen not to read such available terms and then unknowingly engages in the specified act will be deemed to have agreed to the unread terms and the unintended obligation (see also Section 2B-112(a)). While the interplay of these provisions is complex, taken together they provide an ample opportunity for manipulation and sharp practices in commercial and consumer transactions. One can well imagine a vendor setting forth on its web site links to an oppressive standard form agreement wherein the affirmative conduct necessary to bind the unwary user is of such a nature (such as clicking to a subsequent frame) that the average user will do so without understanding the consequences until it has been deemed to have manifested its assent to an agreement made binding by the Act.
iii. Statute of Frauds. In dealing with the traditional protections afforded by the Statute of Frauds in Section 2B-201, the Act erodes the requirement of a writing through its substitution of "authentication" (with all its problems as noted above) for an actual signature. It also broadens the traditional exception to the Statute arising from tendered and accepted performance so that under Section 2B-201(c)(i) the tender and acceptance of one performance or element of information under an agreement is sufficient to take the entire agreement outside of the protection of the Statue. It is unclear from the Act's language what portion (whether material or preponderant) of the overall performance required under a contract need be tendered and accepted, or whether some or all the information to be provided need be made available or accessed. Such uncertainty would seem particularly bothersome in the context of Internet transactions where by necessity a licensee's access to some information concerning the proposed agreement would occur in every instance as a precondition to establishing the nature of the transaction that may or may not be entered into.
iv. Agreement Despite Uncertainty as to Material Terms. The Act's general rules of contract formation as described in Section 2B-202 are extremely aggressive in finding contracts under circumstances in which the parties themselves may not have consciously agreed on all material terms. Thus, Section 2B-202(b) provides that a contract may be found even if the time at which the alleged agreement was made cannot be determined. More importantly, Section 2B-202(c) holds that as long as the parties "have intended to make a contract" the existence of multiple, open material terms does not preclude contract formation so long as "there is a reasonably certain basis for giving an appropriate remedy". Conduct or performance by both parties is necessary to overcome "material disagreement about a material term," but as in the Statute of Frauds situation it is unclear how much conduct or performance is necessary to overcome this obstacle. While these rules of formation are directly derived from similar provisions as to the sale of goods in Article 2 (see. "Article 2 of the U.C.C. v. Common Law: Contract By Surprise?" by Robert S. Tesler. The Metropolitan Corporate Counsel (June, 1998, p.6) on how Article 2 diverges from stricter common law rules and resulting risks to negotiating parties), the Article 2 context of an easily identified market for the sale of fungible, tangible goods will often not exist for the information to be licensed under Article 2B. In the absence of a readily available market price and given the variety and complexity of information licensing arrangements, relying upon the court to supply "an appropriate remedy" for open terms seems more likely to hinder rather than advance the contracting process. Faced with the possibility that a state court judge will treat a one year pay-television license for "TITANIC" as if it were a one year pay-per-view license for "THE POSTMAN", negotiating parties are more likely to insist upon preliminary understandings that no agreement is reached until a final written document is signed, then to engage in their current less formal negotiating processes. Additional uncertainty is added to the contract formation process by the provisions in Section 2B-203, which provide that through actions deemed to constitute the "manifestation of assent" under Section 2B-111, a party may be held to have assented to conditions set forth by the other party without ever having actually reviewed the nature of such conditions.
The provision in Section 2B-203(d)(ii) that acceptance of a conditional offer by manifesting assent is nonetheless subject to the contrary express agreement of the parties in so far as such express agreement relates to terms as to "price and quantity" should, in the context of the licensing of information, rather extend to terms as to "price and scope".
v. Submission of Ideas. The rules as to when a submission of information may give rise to a contract as to the use of such information in Section 2B-206 (b)(C)[sic] appear to impose upon recipients a duty of "seasonable" notification as to existing review procedures in order to preclude contract formation. Given the volume of such submissions and their tendency to arrive at the desk of everyone but those responsible for their processing, it is suggested that personal notification not be a precondition to limiting contract formation to existing submission procedures so long as such procedures are generally made known to the public (e.g. via a web site or publication).
vi. Limit Aggressive Formation Rules to "electronic" and "Software" Context. It is strongly suggested that in light of the above referenced concerns, the Act's aggressive formation rules be limited to circumstances in which the relevant negotiation or offer and acceptance have occurred entirely by electronic means (e.g. over the Internet) or pertain solely to gaining access to computer software via a "Mass-Market Transaction" (see Section 2B-102(32). Otherwise, the risk of uncertainty will have a chilling effect on a wide range of existing commercial dealings in information.
d. Contractual Use Restrictions.
i. A Central Concept. - as defined by the Act, "contractual use restrictions" include virtually all limitations on the use of information created by contract (2B-102(13)).
ii. Exceeding a Contractual Use Restriction is a Breach of Contract (2B-109(a)).
iii. Implied Limitations on Use. In order to avoid irrational outcomes, the requirement set forth in Section 2B-307(b) that "a licensee shall not exceed the expressly granted contractual rights or exercise informational rights in the information [licensed] other than those [expressly described or necessary to exercise those expressly granted]" must be qualified so as to operate only where such exercise outside of the express grant would be in violation of an otherwise existing, non-contractual right of the licensor. This limitation can be made clear by insertion of the phrase "as to the licensor " in the second sentence of Section 2B-307(b) so that it would read in its entirety as follows: "however, use of the information or informational rights in a manner inconsistent with this limitation is not a breach of contract if the use would be permitted under applicable law as to the licensor in the absence of the limitation". Absent this clarification, under circumstances where Party A owns and licenses rights in a film to Party C for 1998 and Party B owns and licenses rights in the same film to Party C for 1999, Party C could be deemed in breach of both licenses merely by exercising its properly granted rights since its exhibitions in 1999 would be read as a violation of its grant from Party A and its exhibitions in 1998 as a violation of its grant from Party B. Even with the limiting language suggested above, Section 2B-307(b)'s reading into a grant of informational rights an implied agreement not to exceed such grant truly appears necessary only where the granting party can claim no independent property interest in the information being licensed, as for instance, in the case of non-copyrightable databases. Where the licensor does possess an independent property right in the information licensed, and where the licensee has made no express agreement not to use the information outside of the grant, it seems an unreasonable interference with the freedom of contract for the Act to provide that a use outside the express grant may be a breach forming the basis for recision even where the licensee has otherwise fully paid for and complied with the express terms of its agreement and the licensor possesses a full set of available remedies under the relevant aspect of intellectual property law (e.g. remedies available under copyright).
iv. Limitation on Number of Users. The implied limitation on the number of authorized users of licensed informational rights set forth in Section 2B-307(c) should turn upon the commercial circumstances existing at the time of use, rather than at the time of the agreement since many of the licenses falling under the Act may be for long periods of time in which circumstances may substantially change from the time at which the agreement was entered into. For example, a blanket license to exhibit a film by means of High-Definition Television entered into in 1998 for a ten year period of time and not specifying the number of permitted users should not have the number of permitted users determined by the commercial circumstances in 1998 when there are no HDTV viewers, but rather the commercial circumstances pertaining within each respective year of the licensed term.
v. Electronic Regulation of Performance. Section 2B-310(d) stating the conditions under which an electronic or physical restraint on use of licensed information may be permitted, needs to be clarified so that such restraint may be utilized only when the conditions of both Section 2B-310(b) and Section 2B-310(c) are satisfied. Otherwise, as presently drafted, a restraint exercised under Section 2B-310(b) would be permitted even if it had the effect of preventing a fully performing licensee's access to its own information at the end of the term of license.
vi. Termination, Cancellation and Material Breach. Section 2B-627(b) makes it a breach of contract for a licensee to continue to use the information that is the subject of a license after such license terminates, even under circumstances where such use is pursuant to a valid third party grant of rights and regardless of whether the licensor possesses an otherwise existing, non-contractual property interest in such information that extends beyond the term of the license. Thus, if Party A licenses a film to Party C for exhibition in 1998 where Party A's sole underlying rights in such film are limited to 1998, Party C's exhibition of such film in 1999 under a valid license from Party B, who owns the 1999 exhibition rights for such film, will nonetheless place Party C in breach of its contract with Party A., a clearly irrational outcome.
Section 2B-601(b) similarly elevates contractual use restrictions to a status of unprecedented and irrational importance by providing that they alone, among all obligations under a contract, remain enforceable despite a prior, uncured material breach by the party seeking to enforce them. No reasoned basis exists for this special treatment wherein a contractual right to restrict a licensee's use of information is found regardless of whether the licensor possesses an otherwise existing, non-contractual property interest in such information and under circumstances in which the licensor may have provided absolutely no consideration for the licensee's obligation. Certainly, at the very least, any continuing restriction upon the licensee's use of the relevant information after an uncured, material breach by the licensor should arise solely under the circumstances detailed in Section 2B-625(b)(2), where the information so utilized either exists in or has solely been made available from copies provided by the licensor pursuant to the then materially breached, terminated or cancelled license. No restriction should be operative on the licensee in the event that at the time of such use the licensor has ceased to have an otherwise existing, non-contractual property interest in the relevant information and the licensee's use is pursuant to an independently available source for the information. Section 2B-701(c) and Sections 2B-702(b)(3) and (4) should similarly be revised to limit the circumstances under which a licensee's use of information is restrained after the extinction of the agreement giving rise to such restraint.
As noted above, the June re-draft of Part 5 of the Act greatly enhances the clarity and completeness of the treatment of the issues addressed therein. Nonetheless, a number of definitional and conceptual ambiguities need further sorting out.
A. "Financier". As defined in Section 2B-102(21), "Financier" "means a person...which provides a financial accommodation to a licensor or licensee in a transaction otherwise governed by Article 9 or Article 2A and which obtains an interest in a license or related contract right of the party to which the financial accommodation is provided". Two aspects of this centrally important definition require clarification. First, what constitutes a "financial accommodation" (e.g. does it include a licensee's payment or agreement to pay a guaranteed license fee in exchange for a present or future use of licensed information?). Second, whether the limitation to "a transaction otherwise governed by Article 9 or 2A" operates to exclude from the definition and hence the operation of Part 5 transactions wherein a security interest is granted in a copyright, a matter arguably not governed by either Article 9 or Article 2A (see In re Peregrine 601 F. Supp 828).
B. "Transfer". As defined in Section 2B-102(48), a "Transfer" includes "with respect to contractual rights...an assignment of contract [but]...does not include an agreement for the...exercise of contractual rights through a...sublicense". This would appear to mean that the rules as to "transfers" under Part 5 apply to assignments of contractual rights, but not to exclusive sub-licenses of such rights, even though the Copyright Act (see Section 101 "transfer of copyright ownership") treats both such transactions as equally effective in conveying an interest under copyright. This possibly divergent treatment of transactions that the Copyright Act provides should have the same effect raises a series of uncertainties that run throughout Part 5 and ties directly into the related definitional problem of whether a "contractual interest", as repeatedly referred to in Part 5 but never defined, includes a sublicense of a contractual right where the sublicensee is not in privity with the original licensor or only an assignment of such right pursuant to which the assignee does enter into privity with the original licensor (see Section 2B-502(1), Section 2B-503(a), Section 2B-504(b), Section 2B-507(a) and Section 2B-602(b)(3)). For example, do the limitations on licensee "transfers" set forth in Section 2B-507 apply only to assignments and not to sublicenses? If so, why should transactions having the same effect under the Copyright Act be subject to differing rules under Article 2B? If not, why are sublicenses excluded from the definition of "Transfer"?
ii. Other Issues.
A. Licensee's Title to a Copy. Since Section 2B-501(b)(2)(B) provides that in a license, "a licensee's right to possession or control of a copy is governed by the license and does not depend on title to the copy", does this mean that in circumstances in which a licensee of information such as a film independently purchases a videocassette copy of such film, its right to possess or control such copy is now subject to the license, even though the copy was independently obtained? If so, is it the Act's intented effect to reverse the "first sale" doctrine that one might otherwise deem to control this situation? Assuming the contrary, it would appear advisable that all references to copies in Section 2B-501(b) be clearly limited to copies "delivered by the licensor to the licensee pursuant to the terms of the license".
B. Financiers Interest in Licensee's Rights. In addressing the rules applicable to the creation, perfection and enforcement of a financier's interest in a licensor's contractual interest in a license, Section 2B-503(9)(ii) provides that absent licensee consent "no financier's interest can be created or perfected to the extent that the interest purports to include intellectual property rights of the licensee." If the relevant license embodies a transfer of rights in the licensed information to the licensee (as it would, if an exclusive license under copyright), are not such transferred rights "intellectual property rights of the licensee" and hence excluded from the reach of the financier's security interest by operation of this provision? If so, has the Act inadvertently created a blanket prohibition on film financings wherein the lender seeks to secure its loan by using as collateral exhibition rights subject to a distributor's license, even where the bank seeks only a subordinated interest?
C. Right to Demand Assurance. Section 2B-504(c) sets forth circumstances under which a licensee may demand assurances from the transferee of the licensor, where such transfer delegates performance obligations. Query how there may be a "transfer that delegates performance" as provided in this section, when by definition in Section 2B-102(48) a "transfer" "does not include an agreement for the performance of contractual obligations...through a delegate"?
As noted above, the Act's use of the Article 2 performance model brings with it a rather literal adoption of rules originally designed for the tender and acceptance of tangible, fungible goods in a sales context. This mismatch between the discrete and concrete transactions setting the paradigm for Article 2 and the often much more complex and enduring information transactions captured by the broad scope of the Act creates a series of problems under Part 6 as discussed below:
i. Tender and Acceptance. Section 2B-601(c) provides that a "tender of performance occurs when a party, with manifest present ability and willingness to do so, offers to complete the performance". A central question arises as to whether this definitional test is workable under circumstances where the essence of performance is not the discrete delivery of a tangible object to be sold, but a grant of information rights subject to ongoing cross-covenants that may last in excess of seventy years. How does one "accept" a performance of such duration and when reasonably should such acceptance be deemed to occur? Such questions are not idle, given the flat requirement under Section 2B-601(e) that "a party shall pay or render any consideration required under the agreement for any performance it accepts". If, as provided in Section 2B-601(c) "tender of performance entitles a party to acceptance of that performance", how does one assess the tendering parties "manifest present ability" to perform when the performance may cover a license decades long in duration, where the licensed rights are contingent upon the licensor's continuing fulfillment of third party obligations such as the payment of residuals, participations and bank loans?
ii. Submissions of Informational Content. Section 2B-603(1) excludes from the tender and acceptance rules submissions of informational content where an agreement requires that such "informational content" be to the satisfaction of the other party. While "informational content" means "information that is intended to be communicated to or perceived by an individual in the ordinary use of the information" and "information" includes "images, sounds...or works of authorship...", it would be extremely helpful if the definition of "informational content" could be made specifically to include the copies on which information is made available (e.g. film, videotape and digital masters) where it is the technical quality of the sound and images contained therein that is the subject of the licensee's "to the satisfaction" approval right.
iii. Cure of Breach. Section 2B-606(a)(3). It would be helpful if somewhere within this section, it is stated explicitly that notwithstanding the cure of a breach, the injured party is entitled to any damages arising between the time of required performance and any subsequent cure for a breach of that performance. If it is the intention of this section to preclude damages for a cured breach other than in circumstances where the cure occurs before the agreed time for performance, then Section 2B-606(a)(2) should be deleted because it would then have the effect of denying damages to an aggrieved party that in the interest of preserving the contract forbears from cancellation in order to permit an untimely cure.
iv. Payment on Tender of Copies. Section 2B-607(h) should be revised so that its requirements as to payment upon acceptance of a tendered copy clearly state that the tender triggering an obligation of acceptance and payment be both "timely" and "conforming". Section 2B-607(h)(3), calling for a single delivery of copies or else delivery in lots against an apportioned contract fee makes little sense in the licensing of information (e.g. pursuant to a long term multi-picture "output agreement") and should be deleted in its entirety as an inappropriate carry-over from Article 2. All of the payment requirements set forth in Section 2B-607(h) should explicitly be made subject to the recoupment provisos of Section 2B-710.
v. Refusal of Defective Tender. Section 2B-609(c), making refusal of tender ineffective after acceptance, should be conformed to Section 2B-613(d), which allows refusal if the prior acceptance was based upon a reasonable assumption of seasonable cure.
Section 2B-612(1) should be clarified so that use of information contained on a refused copy is not a breach of contract if said use (e.g. for promotional purposes) is otherwise authorized by the contract.
Section 2B-614(c)(3), barring revocation of the acceptance of a copy after the party attempting to revoke such acceptance has received a substantial benefit from "the information", which benefit cannot be returned, should be revised to make it clear that revocation is to be barred only when the benefit is derived from actual use of the particular copy rather than the licensed "information" in general. This is necessary since the licensee may have entirely valid rights to exploit the licensed information that are unrelated to the copy in dispute (e.g. as when a film licensee utilizes independently delivered promotional material for a film prior to revoking its acceptance of a non-conforming master tape of such film previously accepted on the basis of a now unfulfilled promise to cure).
vi. Access Contracts. Section 2B-615(b), setting forth conditions under which an intermittent and occasional failure to provide access to information does not constitute a breach, should be revised so that any such failures are forgiven only when consistent with both the express terms of the agreement (Section 2B-615(b)(1)) and either of the conditions set forth in Sections 2B-615(2) and (3). Otherwise, this section can be read to provide that if a failure meets either of the conditions set forth in Section 2B-615(b)(2) or (3), it is to be forgiven even if it violates the express terms of the agreement.
vii. Correction and Support Contracts. Section 2B-616 should be expressly limited to services provided with respect to computer programs, otherwise these provisions limiting the licensor's obligations may be misinterpreted as being applicable to covenants, representations and warranties typically made as absolute obligations by licensors of information such as motion pictures.
viii. Development Contracts. Section 2B-618 should be clarified to indicate that the requirements set forth in Section 2B-618(b) are made a part of the developer's obligations in a development agreement and that a failure to comply with them will constitute a material breach of such agreement. Otherwise, the requirements of this section are without remedy and meaningless.
ix. Risk of Loss of Copies. Section 2B-623(c) should be clarified so that risk of loss passes to a licensee only when the "negotiable document", "third party acknowledgment", or "directing record" legally binds the bailee to deliver or give access to the relevant copy to the licensee.
x. Force Majeure. The allocation of performance obligation set forth in Section 2B-624(c) should be deleted as an Article 2 carry-over inappropriate to information licensing. Section 2B-624(d) should be modified in conformance with its model in Article 2, Section 2-616 by specifically limiting the "notice in a record of a material or indefinite delay" to a delay qualifying pursuant to Section 2B-624(a).
g. Warranties and Remedies.
i. Licensee Specifications. The liability pursuant to Section 2B-401(a) of a licensee for claims arising from acts taken by a licensor in compliance with furnished "specifications" remains troubling given the customary allocation in the entertainment industry of the risk for such claims to licensors and the difficulty of proving whether a licensor had "reason to know" of a non-infringing alternative. Continued inclusion of this provision will have the effect of converting a customary allocation of risk into a matter whose factual context will inevitably be litigated upon the occurrence of a significant claim.
ii. Statute of Limitations. Section 2B-705(b) should be revised so that it is clear that for purposes of calculating the running of a statute of limitations, a breach of warranty arises as of each date of use or exhibition of information where the use or exhibition itself triggers the relevant breach (e.g. if the warranty is of non-infringement, breach arises on the date of each infringing performance.)
iii. Consequential Damages for Published Informational Content. Section 2B-707(d)(i)'s preclusion of "consequential damages for losses caused by the content of published informational content unless the agreement expressly so provides," continues to raise very serious problems. Unless severely cut-back or deleted in its entirety, this limitation on consequential damages will, in practical effect, preclude all remedies for licensees arising from licensor breaches of implied warranty, including the essential implied warranty of non-infringement created by Section 2B-401, and in most instances for express warranty where the licensee lacks the leverage to obtain an express grant of consequentials (see also Section 2B-102(8) where "consequential damages" are defined to include all losses "resulting from any breach of warranty".) At the very least, consequential damages should always be permitted where they arise from a breach of the Section 2B-401 warranty or where they relate to content other than in so far as it concerns "aesthetic, market appeal or subjective quality" (see Section 2B-404(b)(1)).
iv. Recoupment. Strongly restricting current common law rights, Section 2B-710 limits any aggrieved party's right to offset damages against payments due, to circumstances where the offset right arises under the same contract as the payments and, in circumstances where the breach giving rise to the offset right is not material "with reference to the particular performance", only where the party in breach has no future "affirmative" performance obligations under the agreement. Both such restrictions should be eliminated.
v. Right to Relicense. Section 2B-712 gives a licensor "upon breach of contract by a licensee" and "in the exercise of reasonable commercial judgment for the purpose of avoiding loss" the right to relicense information that is the subject of the contract breached by the licensee. This broadly stated right would arguably enable a licensor in a long term, multi-film contract to dispossess a licensee of all films under the agreement due to a non-material breach as to one of those films, a clearly inequitable result. In order to preclude such result, this section should be reworked to follow more closely its model in Article 2, Section 2-703, which limits the licensor's right to dispose of goods solely to the goods that the licensee has rejected, refused or repudiated. In the context of information licensing this would equate to having Section 2B-712 operate only as to the particular information (e.g. film) as to which the licensee's breach relates and then only where such breach is material as to the licensee's obligations with respect to such information. Only if the licensee's breach is material as to the entire contract and licensor has elected to cancel, should licensor have the currently stated general right of relicensing or disposal.
vi. Right to Prevent Use. Following the Act's previously noted pattern of overly-broad contractual use restrictions, Section 2B-715(a)(2) provides that a licensor may prevent a licensee from any continued exercise of rights in the licensed information even after the licensee has cancelled a license because of the licensor's material breach. Unless this continuing right to prevent use is limited to circumstances in which the licensee's use of the relevant information is based upon unreturned copies delivered by the licensor and the licensor's valid otherwise existing ownership right in the information (e.g. under copyright), it has the effect of creating a new and unrestricted property right in information that produces irrational results. For example, under this section as presently drafted, where Party C cancels its license of a film from Party A for Party A's material breach of failing to own the necessary copyright in such film, Party A would nonetheless have the right to prevent Party C from subsequently exploiting such film under a wholly valid license from Party B, the actual copyright holder.
Section 2B-715(c) should similarly be conditioned so that it enables a court to enjoin a licensee's continued use of information after a breach of contract to circumstances where such breach is material and uncured, the licensor has properly canceled the agreement and the licensee's use is not pursuant to an otherwise valid grant of right.
X. What's Next?
b. Trying to Fix It . There is still an opportunity to participate and influence the drafting and legislative process:
i. NCCUSL Members from various States have indicated an openness to discussing the Act with representatives of local businesses.
ii. Written comments can be submitted to the NCCUSL drafting committee prior to October 10, 1998.
iii. Attendance at the July 23rd and November 13-15 drafting sessions by NAB, NCTA and individual company representatives may be crucial.
iv. ALI / ABA participation in considering the Act, suggests that contacts with representatives of the appropriate committees of these associations may also be helpful.
v. State Legislatures. - Should the Act be presented for enactment without adequate restructuring, direct lobbying by companies, trade associations and bar associations may be necessary.
1 George A. Cooke, Jr. is Vice President and Chief Counsel, Film Programming at Home Box Office. A graduate of Dartmouth College, Cambridge University and the Harvard Law School, he has been involved in the licensing and financing of motion pictures for over 15 years.
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