Computer Software: Does Article 2 of the Uniform Commercial Code Apply?
By Professor Andrew Beckerman-Rodau
Suffolk University Law School
120 Tremont Street
Boston, MA 02108
Copyright 1986 by Andrew Beckerman-Rodau
Originally published in 35 Emory Law Journal 853 (1986)
The ubiquity of computer technology is experienced by all of us. 1 Typing
is done on a word processor, banking transactions are performed at automatic
teller machines, and cash registers at many store check-out counters are
computer terminals which instantaneously transmit sales and inventory data to a
central computer. Computers 2 are also used in routing telephone calls, in
synchronizing traffic lights, in the operation of complex medical equipment,
and in the use of everyday things such as cameras and microwave ovens. 3
Additionally, small desk top computers are used at work or at home for tasks
ranging from balancing a checkbook to purchasing stock. 4
It is inevitable that this growing use of computers has raised many legal
issues. 5 One facet of computer technology presenting particularly
difficult legal issues is the treatment of software. 6 The
tremendous expenditures of both time and money required to develop
software coupled with the explosive growth of the software industry 7 has
led to increased litigation. 8
The question addressed by this article is whether article 2 of the Uniform
Commercial Code (hereinafter U.C.C.) applies to computer software. 9 This
question is of more than academic significance 10 in light of the
size of the computer industry. As of 1982 computers outnumbered
people. 11 Additionally, the total investment in software in the United
States already exceeds $200 billion despite the fact that the computer industry
is only in its infancy. 12 Moreover, the software portion of the computer
industry is rapidly becoming the largest segment; by 1990 it is estimated that
80% of the expenditures for computers will be for software. 13
Consequently, failure to bring software transactions within the domain of
article 2 leaves an enormous commercial industry subject to individual state
statutes and state common law. 14
A major drawback of excluding software transactions from article 2 coverage
is that it pushes the software industry back to pre-U.C.C. days, when legal
formalities controlled instead of business and commercial practices. 15 For
example, under the common law if a computer software buyer sent a standard
purchase order form to a software producer who responded with a
standard purchase order confirmation promising delivery, both parties would
assume that a binding agreement was created. However, since in almost all cases
the purchase order and the confirmation forms contain different terms, the
common law would treat the purchase order as an initial offer and the
confirmation as a counteroffer. 16 Therefore, absent action by the software
buyer that amounted to acceptance of the counteroffer, no contract was
created. 17 To eliminate the potential problems that can arise in such a
typical commercial transaction involving an exchange of forms, article 2
substantially changes the common law rule and allows a contract to be created
in the above situation. 18
Additionally, omission of terms in an agreement and reliance by the
parties on prior performance under the agreement, or under other contracts
between the parties, or on industry customs and practices, can be problematic
under the common law. 19 Article 2, however, recognizes that business
entities engage in business in this manner, and therefore it contains 'gap-
filler' sections which supply omitted terms. 20 Also, performance by the
parties and industry practices are given great weight by article 2 and
in some cases may form part of the contract. 21
Another drawback of reliance on state common law is the lack of uniformity
among different jurisdictions. This lack of uniformity was a major problem
prior to the enactment of the U.C.C. and its elimination was one of the main
objectives of the U.C.C. 22 The need for uniformity in commercial law is
even more important today since most businesses operate in national markets. A
disturbing trend is already evident in the computer area. Various states are
beginning to pass specific legislation for the computer industry. 23 A
continuation of this trend will ultimately create a confusing body of law which
will vary among jurisdictions and subject software companies to the difficulty
of attempting to comply with different laws in different states when they
engage in nationwide marketing. 24
Application of article 2 to software transactions avoids overemphasis
on legal formalities and the potential consequences of non-uniformity in the
law since it has been adopted by forty-nine states. 25 The underlying
policy of the U.C.C. is to simplify and clarify the law so it reflects the
realities of the commercial marketplace and provides a uniform and predictable
body of law. 26 Such goals have positively affected commercial transactions
within the domain of article 2 and will necessarily enhance development of
commercial law as it applies to software.
The applicability of article 2 to software depends upon two determinations.
First, software must be a good as defined by article 2. 27 Second, software
must be either sold or supplied via a non-sale transaction which is
determined to be within the domain of article 2. 28
Disagreement exists about whether software is a good because of the confusing
and contradictory usage of terminology in the computer industry. 29 Rapid
advances such as the unbundling of hardware and software 30 and the reduced
need for custom software 31 have led to the formation of independent
software producers who create and mass-market over-the-counter or canned
software which is often usable on more than one computer. 32 These rapid
advances limit the long term precedential value of prior judicial decisions and
thereby create confusion when such decisions are looked to despite changes in
the computer field. 33 Confusion between the intellectual property
aspects of software 34 and the physical medium containing the software
35 have also created uncertainty about whether software is a good.
Additionally, the recognition that software represents a culmination of an
abstract idea transformed into a physical medium embodying the software has
raised questions about the status of software as a good.
A comparison of software with the many things routinely viewed as
goods under article 2 buttresses the conclusion that software is also a good.36
Despite the confusing terminology and the continual advances in
technology, software embodied in a physical medium is analogous to goods such
as a book or an automobile which may embody intellectual property and represent
the transformation of intangible ideas and knowledge into a physical form.
Assuming software is a good, if it is sold article 2 is applicable to the
transaction. However, software is typically licensed to users to protect the
value of the software by controlling its use. 37 Jurisdictions which view
the U.C.C. as a statute and therefore apply it literally would find such
licensing transactions outside the scope of article 2 since title to
the software is not transferred in the typical license transaction. However, an
increasing number of jurisdictions treat the U.C.C. as a code and have extended
the coverage of article 2 to both leases and bailments. 38 A further
extension to software license transactions is supported by the same logic used
to bring leases and bailments within the scope of article 2. 39
Hybrid transactions involving both goods and services have also been a source
of confusion. Various judicial decisions have espoused different analyses which
vary the outcome of a particular hybrid transaction. 40 Therefore, the
determination of whether article 2 applies to software provided with support
services, 41 custom programming, 42 time-sharing arrangements 43 or
service bureau contracts 44 may depend upon which hybrid analysis is
utilized in a particular case. This uncertainty can be avoided by recognizing
and applying the U.C.C. as a true code, thus allowing article 2 to be applied
to all transactions which involve goods as defined by article 2. Such an
expansive view furthers the underlying code policies of uniformity and
predictability 45 and is mandated by commercial practice which is
increasingly utilizing non-sale transactions in lieu of traditional sales
transactions. 46 Otherwise, article 2 will slowly decrease in
importance as fewer true sales transactions are utilized.
This article will examine the question of whether software is within the
article 2 definition of a good. Despite disagreement among commentators, a
careful analysis indicates general judicial agreement that software is a good.
An examination of the tangible and intangible property aspects of software plus
a comparison of software with typical article 2 goods further supports the
conclusion that software is a good. The extension of article 2 to software
transactions which typically involve licensing in lieu of sales will be
explored. In addition, the article will analyze whether the U.C.C. is a code or
a statute, and examine the general treatment of lease, bailment, and hybrid
transactions. A comparison of these types of transactions with software
transactions, coupled with the determination that the U.C.C. is a code leads to
the conclusion that software transactions are within the domain of article 2.
I. SOFTWARE: IS IT A GOOD UNDER ARTICLE 2 OF THE U.C.C.?
A. Sources of Confusion About the Status of Software
The determination of whether software is within the scope of article 2
of the U.C.C. is controlled by two seemingly simple sections. Section 2-10247
makes article 2 generally applicable to 'transactions in goods' and
section 2-105(1) 48 generally defines 'goods' to be all 'movable'
things. Despite these two sections being clear on their face, much confusion
and resulting disagreement exists among commentators about the status of
This uncertainty regarding article 2 treatment of software is inconsistent
with the expansive definition of goods developed by the courts for other
products. In Lobianco v. Property Protection, Inc., 50 the Pennsylvania
Superior Court said that goods under the U.C.C. embraces every species of
property other than real estate, choses in action, and investment securities.51 In
accordance with this expansive view numerous things have been held to
be goods under article 2. 52 It is confusion about the nature of software
that has engendered much of the controversy regarding its status under
One source of this confusion is technical illiteracy, 53 which is
exacerbated by the confusing use of computer terminology by experts in the
field, who themselves disagree on the meaning of many terms. 54 This
renders it almost impossible for the technically unsophisticated to appreciate
the merits of a legal controversy concerning this subject matter. One judge
expressed his frustration over computer terminology by stating:
"After hearing the evidence in this case the first finding the Court is
constrained to make is that, in the computer age, lawyers and courts need no
longer feel ashamed or even sensitive about the charge, often made, that they
confuse the issue by resort to legal 'jargon,' Law Latin or Norman French. By
comparison, the misnomers and industrial shorthands of the computer
world make the most esoteric legal writing seem as clear and lucid as the Ten
Commandments or the Gettysburg Address; and to add to the Babel, the experts
in the computer field, while using exactly the same words, uniformly disagree
as to precisely what they mean."55
The use of the term software to describe different things exemplifies the
confusing nature of computer terminology. 56 Not only are different
definitions of software advanced, but software generally refers to a computer
program regardless of its stage of development or the medium used to contain a
program. 57 A program expressed as a flowchart, 58 or in source
code 59 or object code, 60 is still called software. 61 A computer
program will be referred to as software if the program is embodied in a hard
disk, a diskette, a reel of magnetic tape, or a deck of punched paper cards.62
The manuals which explain the operation of a particular program are
considered software by some people, while others do not include these within
the definition of software. 63 The hiring of a programmer to create
software to be used exclusively on the purchaser's computer may also be
referred to as purchasing software, rather than as the rendition of services.64
In contrast, music, for example, is described using different terms,
depending on the form it takes. Music sold as notes written on a scale is
called sheet music. Accompanying words to the music are called lyrics. If music
is recorded on a phonograph record it is generally referred to as a record.
Music recorded on audiotape will be referred to as a cassette or a reel-to-reel
tape depending on the type of tape medium utilized. Finally, hiring a band to
play music at a party involves a service contract to provide music. It
is therefore necessary to look beyond bare terminology to ascertain the status
of software. The proper determination of whether software is a good must focus
on its stage of development and the medium in which it is embodied.
Another source of confusion arises from rapid changes in computer technology.
The legal system places great emphasis on precedent, but the technology and
market conditions for computers have changed so significantly and rapidly in
the last decade that the factual considerations upon which many decisions were
based may no longer exist. 65
One major change, for example, was the transformation of software from an
incidental part of a computer system designed to operate only on that system to
a separate product which is increasingly independent of the hardware. 66
When computers first began to be used commercially they were expensive
machines requiring specialized software to be custom written for the
computer user. 67 Generally, this software was written by experts provided
by the computer manufacturer. In other cases, standardized software produced by
the manufacturer especially for the computer being sold could be used. The sale
of a computer with software and programming services was accomplished via a
bundled transaction in which the sale price was the same whether the buyer
wanted only the hardware or in addition, the software and programming
services. 68 Antitrust considerations eliminated bundled transactions and
divided the computer industry into two distinct segments-hardware manufacturers
and software manufacturers. 69
As a result of this division, computer manufacturers today sell hardware
which usually includes only operating systems software. 70 They may also
separately sell some applications software, but such software is increasingly
being provided by independent software companies who provide both custom
programming services and mass-marketed or canned software. 71 Although
large computer systems still require custom programming, the sale of canned
software is rapidly becoming a growing segment of the software industry,
especially with the advent of powerful small computers which provide a ready
market for mass produced canned software. 72 Additionally, advances in
computer technology have resulted in software being capable of use on many
computers. Consequently, software which was once viewed merely as a part of a
particular computer system must now be viewed as a product that is distinct
from the computer hardware in which it is used. 73
B. Software: Distinguishing Between Tangible and Intangible Property Aspects
Understanding the general process of how software is created is
important because the software's state may be relevant to whether it is a good
under article 2. 74 Additionally, an understanding of the development
process assists in distinguishing between intangible intellectual property
aspects of software 75 and tangible property aspects represented by
tangible objects or mediums which embody intellectual property. 76 In
determining the scope of article 2 it is imperative to maintain the distinction
between these different property interests because even though intellectual
property may not fit within the article 2 definition of goods, a tangible
object which embodies such intangible property is still a good. 77
Software which starts out as an idea for performing a specific function on a
computer is an intangible at this stage. Since computers do not comprehend
ideas, before such an idea can be employed by a computer it must be reduced to
a computer language which can be encoded onto a physical medium such as
magnetic tape, punched paper cards, or a diskette. 78 At this point
the physical medium containing the software is a tangible object. 79
The particular stage of the software development process or the medium
containing the software is therefore relevant to whether it is a good under
article 2. This is not a novel concept. Property law recognizes that something
may be classified as different types of property depending on its use or form.
Additionally, a change in use can alter the property classification of an
item. 80 For example, a growing forest is considered real property. Once
the trees are cut down, milled into lumber, and placed in a lumber yard as
inventory they are personal property. If the lumber is then used to construct a
house it is treated, at least for many purposes, as realty. 81 Similarly,
information provided by a professor in a lecture is not a good under article 2;
but if the professor publishes the same information in a book or records it on
a phonograph record, the resulting book or record would be a good under article
2. 82 Likewise, software in its early stages of development, when it is
only an intangible idea, is not a good. However, when this idea is translated
into a specific computer language and embodied in a tangible medium such as a
diskette, a 'movable' thing within the article 2 definition of a good exists.83
Even though software in the form of a tangible medium such as a
diskette is a movable thing within the article 2 definition of a good, it may
simultaneously incorporate intangible intellectual property which falls outside
the scope of article 2. 84 In Triangle Underwriters, Inc. v. Honeywell,
Inc., 85 a sale of a computer system consisting of hardware, standard
software, and custom software resulted in breach of contract claims when the
system failed to function properly because the software did not operate as
promised. In determining that the system as a whole was within the article 2
definition of goods, the court noted that the software consisted of both
intangible intellectual property aspects, represented by ideas and concepts,
and the resulting products of those intellectual property aspects which was
This distinction between intangible intellectual property and tangible87
mediums embodying such property has also been identified in other
contexts. In Apple Computer, Inc. v. Franklin Computer Corp., 88 a case
deciding that software was subject to copyright protection, the
defendant argued that software contained in a ROM was not copyrightable since
copyright protection did not extend to tangible physical objects such as a ROM
which is really a part of the computer. 89 The court, however, understood
the distinction between intangible intellectual property and tangible objects
containing such property, and held that although the ROM itself was not subject
matter covered by copyright, the software embodied in the ROM contained
intangible intellectual property that could be subject to copyright
protection. 90 Other courts and commentators have confused this distinction
by declaring simply that software is an intangible collection of ideas or
An examination of some typical article 2 goods further elaborates the
distinction between intangible intellectual property and tangible physical
objects embodying such property. A book is a good under article 2. 92
However, a book comprises ideas which anyone is free to read and utilize since
ideas are in the public domain. For example, if someone purchases a book
describing how to build a house, the reader is free to use the construction
techniques and other valuable knowledge imparted by the book to build a house.
The reader is not, however, free to duplicate the book a house. machine if the
author claims copyright protection for the book. 93 The copyright law
entitles the author to protect the form of expression of the information in the
book. 94 The book itself, however, is a tangible object consisting of
paper, ink and glue which can be freely resold 95 and is a good under
article 2 despite the existence of intangible intellectual property
rights in the book under the copyright law. 96
An automobile is also a good under article 2. 97 However, despite
purchasing and taking title, the owner's rights in the automobile may be
restricted. Novel inventions incorporated in the automobile may be protected by
patent law which would prevent the owner from examining the patented invention
and reproducing and using it elsewhere, such as in another vehicle, without the
permission of the patent owner. 98 Again, in this case something can be a
good within article 2 despite the existence of intangible intellectual property
rights in the good under the patent law.
It has been asserted, however, that when a purchaser or licensor of software
contained in a medium such as a diskette pays for such software, they are
really paying for the intangible ideas represented by the software and not the
diskette, which has little value unless it is encoded with the software. 99
Although this argument may initially seem logical, it breaks down when applied
to the many things held to be goods. 100 Books and magazines are goods
under article 2 even though their value lies in the intangible information they
contain, and not in the paper, binding, or ink used to produce them. 101 It
is difficult to discern any distinction between software embodied in a
physical medium and a writer's ideas or stories embodied in a physical medium.
Both start out as intangible ideas which are ultimately refined and
incorporated into a physical form. Software can be contained on a diskette, a
magnetic tape or on other mediums 102 while a story can be embodied in a
printed book, or on a record or a magnetic tape. In both cases the initial idea
existing in the author's mind is an intangible, which is not a movable thing,
and therefore not a good under article 2. 103 However, once this intangible
idea is converted into a tangible object which embodies the idea, a movable
thing exists which is a good under article 2. A cassette, reel-to-reel tape, or
record from which a story can be listened to are all tangible objects that are
movable things and therefore goods under article 2. 104
It is illogical to reach a different result for computer software.105 Both
magnetic computer tape embodying software and magnetic audio tape
containing a voice reading a story must be inserted into appropriate equipment
to produce the desired output. It seems clear, therefore, that this magnetic
tape is a good whether it contains an audio recording or a computer program.
Otherwise, one has the incongruous result that magnetic tape encoded for use by
a tape recorder to produce audio output is a good while magnetic tape encoded
for use by a computer to produce audio output is not a good. 106
If the existence of underlying intangible ideas or property in a resulting
tangible product divested a tangible object of its status as a good, few
products would be considered goods under article 2. In Crescent Amusement Co.
v. Carson 107 the court said:
"There is scarcely to be found any article susceptible to sale or rent that
is not the result of an idea, genius, skill and labor applied to a physical
substance. A loaf of bread is the result of the skill and labor of
the cook who mixed the physical ingredients and applied heat at the
temperature and consistency her judgment dictated. A radio is the result of
the thought of a genius, or several such persons, combined with the skill and
labor of trained technicians applied to a tangible mass of substance. An
automobile is the result of all these elements, and of patents, etc.; and so
on, ad infinitum." 108
Many products routinely viewed as goods under article 2 are really of value
only because they encompass intangible property in the form of a novel idea or
unique method of accomplishing a task. A television, an automobile tire, a
medical x-ray machine, a telephone, and computer hardware all have value
because they represent an embodiment of intangible ideas. In many cases, the
above products, along with millions of other products, embody novel ideas or
features which are intangible property protected by patent law. 109
Other products are made by secret processes which are also intangible
property. Such processes are maintained by the manufacturer as a trade secret
to preserve the value of the product by preventing others from duplicating it.110
One ubiquitous example is Coca-Cola. 111 The process for making
Coca-Cola is a closely guarded secret because the product resulting
from that secret has enormous economic value. 112 Other products such as
books or magazines have value because, among other things, they encompass
intangible intellectual property rights protected by copyright. 113
Trademarks, which are words or symbols used to identify goods, are another form
of intangible intellectual property which may substantially increase the value
of a good. 114 For example, clothing which prominently displays a 'Gucci'
or 'Izod' trademark may have significantly enhanced value simply due to the
presence of the trademark.
Consequently, things which are tangible movable objects and therefore goods
covered by article 2 are not stripped of their article 2 status simply because
they either embody or result from intangible intellectual ideas or property.115
A contrary approach would frustrate the application of article 2 since
a significant number of goods universally viewed as being within article 2
would fall outside by virtue of patent, copyright, trade secret, or trademark
rights incorporated in or associated with the goods. Since article 2 does not
contain an explicit exemption for software, there is no valid reason to treat
software any differently than other goods which embody intangible intellectual
property. Underlying facts should therefore be the appropriate guideposts
rather than unclear terminology and confusing distinctions.
Looking beyond the terminology and the distinctions between
tangible objects and the intangible intellectual property they may
embody leads to the conclusion that software contained in a tangible object is
a good within article 2.
C. The Status of Software: The Judicial View
A careful analysis of the case law does not reveal great judicial uncertainty
about whether to treat software as a good. 116 The weight of authority
treats computer software as being within the article 2 definition of a good
without lengthy analysis or discussion.
In RRX Industries v. Lab-Con, Inc., 117 the court found the California
version of the U.C.C. applicable to a contract for the purchase of software.
The court, noting that for the U.C.C. to apply the software must be a good, had
no difficulty concluding without analysis that the software was a good under
U.C.C. section 2-105. 118
The court then made a factual determination as to whether the services
provided with the sale of the software were a predominant or incidental part of
the transaction. 119 This determination was necessary since, under
California law, a contract for the sale of goods would be classified as a
service contract outside the domain of article 2, if services provided with the
sale of goods were the predominant aspect of the transaction. It follows from
this decision that the court views software as a good; the investigation of the
services provided in a particular transaction was merely to ascertain whether
the predominant feature of the transaction was the sale of goods or the
providing of services. 120 The court concluded in RRX Industries that the
seller's contractual obligation to install the software, to repair any software
errors, and to train the buyer's employees in the operation of the
software were merely incidental services, 121 and therefore the transaction
fell within article 2.
In Compu-Med Systems Inc. v. Cincom Systems Inc., 122 a contract for the
purchase of software resulted in an action for fraud and breach of contract
against the seller when the software allegedly failed to perform as represented
by the seller. In denying the seller's motion to dismiss the complaint or in
the alternative to grant summary judgment, the court relied upon two section of
article 2. The court found that the buyer had given the seller adequate notice
of the alleged breach of contract, as required by section 2-607(3)(a), 123
and therefore the buyer was not barred from bringing the action. Additionally,
the court found section 2-719(2) 124 applicable to the question of whether
the contract provided an exclusive remedy that precluded the buyer's recovery
of consequential, special, or indirect damages. The court applied article 2 to
this transaction without addressing the threshold question of whether software
is a good; therefore, it must be assumed that the court viewed software as a
good within the domain of article 2.
In W. R. Weaver Co. v. Burroughs Corp., 125 a computer user leased a
Burroughs computer from the defendant and purchased application software to run
on that computer. When the computer and software failed to operate as warranted
the computer user sought consequential damages based on theories of express and
implied warranty and strict liability. The appellate court specifically found
article 2 inapplicable to the computer hardware portion of the transaction
since the hardware was leased and article 2, at least in Texas, is limited to
sales. 126 Article 2 was held applicable to the software sale,
however, and therefore the statute of limitations embodied in section 2-725
127 and the warranty exclusion contained in section 2-316 128 were
applicable to the software sale. 129 Although the court did not directly
address whether the software was a good, such a conclusion is implicit in the
court's application of article 2 to the software transaction.
In Hi Neighbor Enterprises v. Burroughs Corp., 130 a buyer entered
into two contracts for the purchase of computer hardware and accompanying
training, support services and other material. The buyer also executed two
contracts for the purchase of software and computer education courses.
Dissatisfaction with the seller's performance under the contract led the buyer
to sue for breach of contract and fraud. In analyzing the enforceability of
damage and warranty limitation clauses of the contracts, the court, applying
Florida law, determined that sections 2-719 131 and 2-316 132 of
article 2 rendered the clauses valid. 133 Like the court in W.R. Weaver
Co., the Hi Neighbor court also failed to expressly address whether software
was a good and simply implied this conclusion by finding article 2 applicable
to contracts for the sale of software.
Two courts have expressed some uncertainty about whether software is a good
within article 2. In Samuel Black Co. v. Burroughs Corp., 134 a buyer
contracted to purchase a computer as well as software for the computer. The
software was never completed and the buyer returned the computer and sued the
seller for, among other things, breach of contract. The court found that
Michigan law controlled the transaction and stated that 'there is reason to
doubt whether the courts of Michigan would treat the computer system
transaction . . . as falling within the scope . . . of the Uniform Commercial
Code's ('UCC') article on sales.' 135 The court then declined to resolve
the question of the applicability of article 2 because it felt the outcome of
the case would be the same whether article 2 did or did not apply. 136
Based on this reasoning the court simply applied article 2 to the transaction
by analogy. 137
In Hartford Mutual Insurance Co. v. Seibels, Bruce & Co., 138 the court
was also unsure whether software was a good under article 2. In this case a
buyer obtained software under a license agreement and brought suit in tort and
under the warranty provisions of article 2 when the software allegedly failed
to operate properly. The court recognized that the application of article 2
depended, in part, upon a finding that the software was a good. 139
However, the court declined to decide whether the software in question was a
good within article 2 since the court was deciding a motion for summary
judgment and facts relevant to whether the software was within article 2 were
in dispute. 140
The various decisions addressing the question of whether software is a good
under article 2 have either explicitly or implicitly found software to be a
good, or at worst have left the question open. This treatment of software,
combined with the superficial nature of the analyses supporting the judicial
conclusions that software is a good within article 2, indicates only limited
judicial uncertainty about the conclusion that software is a good. 141
II. TRANSACTIONS WITHIN THE SCOPE OF ARTICLE 2
The determination that software is a good within the article 2
definition does not automatically make article 2 applicable to software. Before
article 2 can apply an inquiry must also be made into the type of transaction
involved. 142 Although general agreement exists that the sale of goods is
subject to article 2, disagreement exists about whether transactions other than
pure sales are within the scope of article 2. The applicability of article 2,
for example, to the leasing of goods and hybrid transactions involving both the
sale of goods and the rendering of services varies depending on the
jurisdiction. 143 This is significant for software since it is usually
provided to users via license agreements which are non-sale
transactions. 144 It is therefore necessary to examine and compare
judicial treatment of various non-sale transactions to determine how
software should be treated.
B. The Uniform Commercial Code: True Code or Statute?
The basic question of whether article 2 extends to non-sale transactions
depends, in part, on whether the U.C.C. is viewed as a statute or as a code.145
A judicial conclusion that the U.C.C. is a statute or a code is
determinative, at least to some extent, of its scope. 146 As will be shown
below, if viewed as a statute, non-sale transactions generally would be
excluded from article 2 coverage while such transactions might be covered by
article 2 if the courts treated the U.C.C. as a code.
Although 'statute' and 'code' are frequently used as synonyms, a true code is
distinctly different than a statute. 147 One well know commentator,
Professor Grant Gilmore, provided the following explanation of the
difference between a code and a statute:
"A 'statute,' let use say, is a legislative enactment which goes as far as
it goes and no further: that is to say, when a case arises which is not
within the precise statutory language, which reveals a gap in the statutory
scheme or situation not foreseen by the draftsmen (even though the situation
is within the general area covered by the statute), when the court should put
the statute out of mind and reason its way to a decision according to the
basic principles of the common law. A 'code,' let us say, is a legislative
enactment which entirely pre-empts the field and which is assumed to carry
within it the answers to all possible questions: thus when a court comes to a
gap or an unforeseen situation, its duty is to find, by extrapolation and
analogy, a solution consistent with the policy of the codifying law; the pre-
Code common law is no longer available as the authoritative source. We may
take another, subsidiary distinction between 'statute' and 'code.' When a
'statute,' having been in force for a time, has been interpreted in a series
of judicial opinions, those opinions themselves become part of the statutory
complex: the meaning of the statute must now be sought not merely in the
statutory text but in the statute plus the cases that have been decided under
it. A 'code,' on the other hand, remains at all times its own best evidence
of what it means: cases decided under it may be interesting, persuasive,
cogent, but each new case must be referred for decision to the undefiled code
An examination of the historical considerations leading to the
creation of the U.C.C. indicates that it was intended to produce a single
uniform body of law to which commercial lawyers and businessmen could look to
answer all commercial questions and solve all commercial problems.149
Express U.C.C. language supports the view that the U.C.C. is intended
to be a true code. 150 Section 1-104 states that the U.C.C. is intended as
a uniform coverage of its subject matter. The official comment to this section
clarifies this position further by stating that the U.C.C. is 'intended as a
uniform codification of permanent character covering an entire 'field' of
The U.C.C. also acknowledges that commercial law changes and therefore the
U.C.C. should be liberally construed to promote the underlying policy of
permitting continuous expansion of commercial practices. 152 An official
comment states that the U.C.C. is intended to be developed in light of
unforeseen and new circumstances and practices. 153 Other official comments
go further by implying areas outside the express language of the U.C.C. which
could be subject to U.C.C. principles. 154 The U.C.C. also deals with
the possibility of gaps which will inevitably arise both from
unforeseen problems and from changes in commercial transactions and practices.155
Section 1-103 allows the common law to be used to fill in gaps that may
be discovered. 156 A careful reading of this section supports the
conclusion that the U.C.C. is a true code since the common law is subordinate
to U.C.C. provisions. 157
Proponents of the position that the U.C.C. is a statute look to the very
basis of our system of jurisprudence which finds its roots in the English
common law. 158 A common law system narrowly construes statutes to limit
their application to situations explicitly within the statutory language.159
Judicially developed principles, known as common law, are then utilized
to deal with situations not within the domain of a statute. 160 Great
emphasis is attached to these decisions. 161 In contrast, a civil law
system relies on codes which are intended to be the source of general
principles applicable to situations falling both within and without the express
code language. 162 The underlying policy of a code is therefore
contrary to the common law basis of our legal system.
If the U.C.C. is viewed as a statute, it follows that the scope of article 2
is limited to the exact wording of article 2. Section 2-101 states that the
title for article 2 is 'sales.' If article 2 is read in light of principles of
statutory construction which promote internal consistency it appears to be
limited to sale transactions. A sale is expressly defined to be the passing of
title from the seller to the buyer for a price. 163 A careful reading of
the entire text of article 2 indicates that only ten sections fail, at least in
part, to explicitly mention 'sale,' 'buyer' or 'seller.' 164 However, seven
of these sections refer either directly or indirectly to 'contracts' or
'agreements' which are defined by section 2-106 to refer to contracts or
agreements for the present or future sale of goods. 165 Consequently only
three sections in article 2 are not explicitly limited to the sale of goods,
and therefore if it is viewed as a statute its scope is primarily limited to
sales. 166 Agreements to provide software by nonsale transactions, such as
by licenses, would not, under this approach, be generally covered by article
The one difficulty with this approach is the statement in
section 2-102 that article 2 is generally applicable to 'transactions in
goods,' a significantly broader area than sales transactions. 168 At least
one commentator has argued that the express statement in section 2-102 that
article 2 applies to transactions in goods is misleading due to the inadvertent
use of the word 'transactions' in place of 'sales.' 169 However, section 2-
102 also states that article 2 applies to transactions in goods unless the
context otherwise requires. It can therefore be argued that this broad
statement of scope is not meant to undermine the explicit references to sales
in almost every section of article 2. 170 Instead, this broad scope is
simply for purposes of accuracy since some sections of article 2 deal both with
sale of goods and with matters collateral to the sale of goods. 171
Judicial decisions have not expressly confronted the issue of whether the
U.C.C. is a statute or a code. The general approach of the case law has been to
focus on a particular non-sale transaction to determine if it should be covered
by article 2 rather than examining the underlying question of whether
the U.C.C. is a code or a statute. This approach is exemplified in Hertz
Commercial Leasing Corp. v. Joseph. 172 In this case a dispute arose over a
leased muffler pipe-bending machine and the court was confronted with the
question of whether the U.C.C. applied to equipment leases. 173 Rather than
analyzing whether the U.C.C. was a code or a statute the court instead
carefully examined the particular transaction involved. The court concluded
that the reasons for and the extent of equipment leasing today justified
holding that such leases were covered by the U.C.C. 174 An analysis of the
decisions that have examined whether to extend article 2 beyond sales
transactions indicates a judicial split. Some courts appear to view the U.C.C.
as a statute and consequently limit it to its express language 175 while
other courts seem to view it as a code by broadly applying U.C.C. principles to
transactions outside the express scope of the relevant section. 176
C. Lease and Bailment Transactions Generally
The use of leases in lieu of outright purchases is a recent and rapidly
expanding practice 177 which challenges the judiciary to decide how to view
the U.C.C. In Bona v. Graefe, 178 the court treated article 2 as a statute
and rejected the application of the article 2 warranty sections to the lease of
a golf cart. The court made its position very clear by stating that 'if the
draftsmen had intended the sections to apply to leases of goods as well as to
sales, they should have said so.' 179 The court then emphasized its view of
article 2 as a statute by stating that the extension of article 2 to leases
would be improper judicial legislation. 180 The same logic prevailed
in W. R. Weaver Co. v. Burroughs Corp., 181 which involved a lease
of a computer coupled with the sale of software to be used to operate the
computer. Article 2 was held applicable to the software since it was sold but
inapplicable to the computer since it was leased and therefore not within the
scope of article 2. 182
In contrast to this statutory approach, Hertz Commercial Leasing Corp.
v. Transportation Credit Clearing House 183 recognized that the failure to
expressly include leases in article 2 was a gap in article 2. The court looked
to the underlying policy of article 2 to bridge the gap rather than simply
dismissing the code as inapplicable and resorting to the common law. 184
Hertz Commercial Leasing Corp. recognized that the leasing of equipment is a
recent device which is often equivalent to a sale but is resorted to for tax
purposes. 185 Furthermore, the court realized that it would be anomalous if
this expanding volume of commercial transactions structured as leases were
subject to different rules than outright sales when both transactions resulted
in identical economic results. 186
Although most cases discussing the scope of article 2 involve leases, the
question of whether bailments are covered by article 2 has also arisen. In
Mieske v. Bartell Drug Co., 187 the Supreme Court of Washington, sitting en
banc, extended article 2 to a bailment transaction. 188 In this case, a
customer delivered thirty-two fifty foot rolls of developed movie film to a
store to be spliced onto four larger reels. The film company to which the
stores sent the film lost or destroyed the film. In awarding damages to the
customer, the court utilized article 2 provisions to find an exclusionary
clause on the film receipt which limited damages to be unenforceable. In
analyzing the applicability of article 2 the court focused on section
2-102 which declares that article 2 applies to 'transaction in goods.' 189
The court then concluded that the drafters of article 2, by including
section 2-102, intended its scope to be broader than sales, and therefore the
bailment involved in this case came within article 2. 190
Hertz Commercial Leasing Corp. and Mieske exhibit judicial recognition of the
U.C.C. as a code rather than a statute and a consequent willingness to apply
article 2 to transactions that are not within the express wording of article 2.
However, the majority of courts take a middle ground between viewing article 2
as a statute or a true code. For example, only when a lease transaction is
determined to be analogous or equivalent to a sale will many courts apply
article 2 to the transaction. 191 Additionally, rather than applying
article 2 in its entirety to lease transactions, most courts apply article 2 on
a section-by-section basis. 192 A direct consequence of this
approach is that a court must first determine if the lease transaction in
question is the type within the scope of article 2, and second, if it is
subject to article 2, which article 2 sections apply. 193 Both of these
findings are heavily dependent on factual circumstances and therefore they are
not conducive to easy determination or predictability. Consequently, this
approach, although laudable in its attempt to liberally construe the U.C.C., in
reality leads to uncertainty because whether a particular lease is within the
domain of article 2 and which sections of article 2 apply depends on the
particular facts of each case. 194 Such a result is contrary to the goals
of clarity, stability, and uniformity in the law which were basic policy
reasons for the creation of the U.C.C. 195
D. Sale and Lease of Software
The outright sale of software alone is within the domain of article 2
if software is a good. 196 Additionally, the sale of software coupled with
the sale of a computer system is within the domain of article 2 if both the
software and the hardware are goods. In Triangle Underwriters 197 a
computer system that included both hardware and software was sold. 198 When
the system failed to operate properly because the software did not perform as
promised the buyer brought suit for breach of contract. The court held
that the transaction was a sale of goods and applied the statute of limitations
found in section 2-725 of article 2 to bar the action. 199
The judicial trend, already discussed, of extending article 2 to leases in
general applies with equal force to software leasing. In Office Supply Co. v.
Basic/Four Corp., 200 the court had no difficulty applying article 2, with
regard to warranties, remedy limitations, and the statute of limitations, to
both the sale of hardware and the lease of software. The court noted that,
although the software transaction was technically a lease, it was structured as
a lease simply for purposes of copyright protection and therefore did not
affect whether article 2 applied. 201 Additionally, the court noted that
neither party to the suit had contended that the software lease had any effect
on the applicability of article 2. 202 Likewise, United States Welding v.
Burroughs Corp. 203 assumed, without discussion, that the warranty
provisions of article 2 were applicable to a transaction involving the lease of
both computer hardware and operating software. 204
It is apparent, therefore, that the leasing of software is not treated, for
purposes of applying article 2, any differently than the leasing of any
other equipment or personal property. Once a determination is made that
software is a good, the same rationales that allow article 2 coverage to
extend, in many jurisdictions, to leases of other goods also applies to
E. Licensing of Software
If article 2 is viewed as a statute strictly limited to its express language,
then courts finding leases to be outside article 2 because a sale has not
occurred will probably determine a license of software to be outside article 2
for the same reason. 205 In both cases a transfer of title has not occurred
and therefore a sale, which is required by the express wording of almost all
sections of article 2, has not taken place. 206
If article 2 is viewed as a code, the judicial trend of extending article 2
to leases should also apply to the licensing of software. 207 In Mieske the
same logic was used to extend the coverage of article 2 to a bailment for
mutual benefit. 208 This logic also applies to software licensing.
Establishing a separate body of law to cover each new type of non-sale
transaction used in place of a sale would undermine the original impetus behind
the U.C.C. which was to unify and clarify commercial law. 209
Hertz Commercial Leasing Corp. and other cases which apply article 2
to leases look beyond the name given to a transaction. These cases focus on the
underlying reason for the transaction and whether the transaction is equivalent
or analogous to a sale. 210 The growing field of equipment leasing in lieu
of a sale is used for tax, financing, and other commercial purposes.211
For example, in some cases leases are structured with options to buy
the goods at the end of the lease term for a nominal cost, such that the leases
are really analogous or equivalent to a sale. 212 The effect of software
license transactions and the underlying rationale for such transactions must
therefore be examined, since this is the most common method of providing
software to users. 213
An understanding of why software is licensed requires an examination of how
new products in general are protected from duplication. When a new product is
created and marketed, the development costs are normally recouped through mass
production and sale of the product. However, many products can easily be copied
and sold at a fraction of the developer's cost since the copier does not have
any development costs to recoup. 214 To combat this problem companies rely
on trade secret law if the product can be made in such a manner as to make
duplication impossible. 215 Additionally, products only made available to a
limited number of users may be confidentially licensed as trade secrets if the
use of the product can be controlled to maintain secrecy. 216 Otherwise,
patent and copyright law may be utilized to erect legal impediments to
copying a product. 217
The applicability of patent law to software is unclear, 218 but even if
applicable, rapid changes in computer technology would eliminate the value of
any patent protection, which is both costly 219 and time consuming to
obtain. 220 A patent typically takes several years to obtain and the
software may be obsolete or have greatly reduced value by the time a patent is
issued. 221 Trade secret protection was formerly the most widely used
method of protecting software. 222 However, its current use is restricted
at most to specialized software which is individually licensed on a limited
basis and therefore subject to secrecy and control. 223 The use of trade
secret law in the rapidly growing market for canned software, designed
for use in small inexpensive computers used at home and by small businesses, is
questionable since no practical method exists for ensuring that a tremendous
number of users will maintain the software as a trade secret. 224 Such
confidential use by all users would be necessary for trade secret protection to
be successful since a single public disclosure of a trade secret vitiates trade
secret protection. 225
The ease with which software can be duplicated, 226 the questionable
applicability and suitability of patent law to software, and the limited
utility of trade secret law have resulted in increased reliance on copyright to
protect software. 227 There are certain limitations, however, to copyright
protection. 228 Although copyright law prohibits unauthorized duplication
of software even if it is sold, 229 sale of the software by the
software producer allows the buyer to freely resell or transfer the software to
someone else. 230 Copyright does not protect the underlying algorithms or
processes upon which a computer program is based even if these are proprietary
information of the software producer. 231 Copyright also does not restrict
use of a program, so it is possible for several users to share the same
software. For example, the software can be loaded into a single computer so it
is available to multiple users who have access to the computer via remote
Due to the limitations of copyright protection, software producers
have been forced to resort to additional methods used in conjunction with
copyright to protect their investments in the creation of software. Technical
methods such as copy protection schemes have provided one source of
protection. 233 Licensing of software provides additional legal protection,
especially when the software is already protected by copyright. 234
Under the copyright law, the copyright owner has several exclusive rights
which include the right to control the making of copies and the public
distribution of copyrighted works. 235 This means that copyrighted software
can not be reproduced or distributed without the permission of the copyright
owner. However, the so-called 'first sale doctrine' provides that the
sale of a copy of the copyrighted work embodied in a tangible medium
extinguishes the copyright owner's distribution right with regard to the
particular copy sold. 236 As a result, once software embodied in a tangible
medium such as a diskette is sold, the buyer is free to sell or otherwise
dispose of that diskette without permission of the copyright owner. 237
However, the first sale doctrine includes an express limitation. It does not
apply to anyone who has obtained possession of the tangible medium containing
the copyrighted work 'from the copyright owner by rental, lease, loan, or
otherwise, without acquiring ownership of it.' 238 Therefore, if a software
vendor retains ownership in all of the copies of his software by only selling
users a license to use the software, the effect of the first sale doctrine is
avoided. 239 This allows software producers to restrict disposition of the
software by users.
Software licenses are also used to attach additional conditions to the use of
software. 240 One typical condition is that the software user must protect
the underlying algorithms 241 and processes used in the software which are
beyond the scope of copyright protection. 242 Typically this underlying
information is alleged to be a trade secret of the software producer which the
software user is required to maintain in confidence. 243 This condition,
which is certainly valid for software that is individually licensed on
a limited basis, is also included in many shrink-wrap or tear-me-open licenses244
accompanying mass-marketed or canned software. 245 Although the
validity of requiring shrink-wrap licensees to protect underlying algorithms
and processes as trade secrets is questionable in light of established
principles of trade secret law, 246 both Louisiana and Illinois have
enacted explicit statutes making such a license provision enforceable. 247
Therefore, by licensing software the software producers are attempting both to
control its use by limiting its transfer to others and to protect the
underlying algorithms and processes contained in the software. 248
Although licensing of software is not an actual sale under article 2 since
the software producer retains title to the software, it has many of the
incidents of a sale. 249 Canned software obtained subject to a shrink-wrap
or tear-me-open license is most analogous to a sale. A typical license of this
type would be classified as a perpetual paid-up license since the one time
license fee paid for the software is all that is required. 250 Furthermore,
the license is perpetual, provided there is adherence to its terms. In this
type of transaction the software producer has effectively sold the software
despite retention of title, since the producer has no realistic expectation of
ever getting the software back. 251 The extension of article 2 to such software
transactions therefore seems justified on the same basis that article 2 has been
extended to leases and bailments. Article 2 has been applied to leases based
on the realization that leases are often used for tax or other purposes, and
therefore they are really analogous if not equivalent to a sale. 252 Shrink-wrap
or tear-me-open software licenses are likewise equivalent to a sale since they
are utilized, not to avoid a sale per se, but rather for purposes of copyright 253
and protection of proprietary information. 254
Individual licensing of special purpose software on a limited and
carefully controlled basis to preserve trade secrecy has fewer incidents of a
sale. The software producer will have more control over how the software is
used, periodic license fees may be required, and the software may be subject to
return to the licensor once the license is terminated. The duration of such a
license may be critical however. In H.M.O. Systems, Inc. v. Choicecare Health
Serv., Inc., 255 software was provided via a non-expiring or perpetual
license; thus, the lack of title transfer does not seem relevant since a
permanent right to use the software existed. 256 Additionally, the
exponential advancement of computer technology can render a license which is
limited to a specific duration of time equivalent to a sale. In State v.
Central Computer Service 257 a ninety-nine year license was given
for the use of software. 258 The advancement of computer technology
guarantees that this software will be useless prior to the termination of the
license term. 259 Therefore, although the licensor has retained title to
the software the licensor has no expectation that the software will ever be
returned by the licensee because it will be worthless long before the license
term ends. If the duration of the individually negotiated license is for a very
limited time then this type of transaction is less analogous to a sale. However,
despite the fact that some software license transactions may have
fewer incidents of a sale than others, most of these transactions are, to a
greater or lesser degree, closely analogous or equivalent to sales.
The current judicial trend of expanding the domain of article 2, 260
although not uniformly followed, 261 should therefore be applied to all
software license transactions. Just as the court in Hertz Commercial Leasing
Corp. recognized that leases analogous or equivalent to sales should be treated
as being within the scope of article 2 to avoid creation of a separate body of
law for an increasingly common type of transaction, 262 software licenses
should also be covered by article 2 for the same reasons. Software is typically
licensed to protect certain rights provided by copyright and to protect
underlying information utilized in creating the software. 263 In all other
respects most software license transactions resemble sales and should therefore
be treated as being within the scope of article 2. 264
The fact that different types of software licenses have differing incidents
of sale should not affect the application of article 2 to such transactions.
The underlying U.C.C. policy of promoting uniformity in the law requires this
result. 265 Otherwise, whether a particular license transaction was within
the domain of article 2 would depend ultimately on an individual case
by case evaluation of the factual circumstances of each license transaction.
F. Hybrid Sale/Service Transactions Generally
Software is often provided in combination with various types of
services 266 or used in the performance of service contracts. 267
Before examining such software transactions in detail, judicial treatment of
analogous hybrid sale/service transactions generally must be reviewed.
Pure service contracts - the opposite end of the spectrum from pure sales
transactions - generally fall outside of the domain of article 2. 268
However, pure service and pure sale transactions represent the extreme ends of
a continuum. 269 Most transactions are hybrids involving both the sale of
goods and the performance of services. 270
In Skelton v. Druid City Hospital Bd., 271 a hospital patient was
injured during a surgical procedure when part of a suturing needle used by the
surgeon broke off and remained in the patient's body. The needle, which is a
good under article 2, was simply an inexpensive tool used by the surgeon in
performing the operation. Although surgery is primarily a service, the use of
the needle in performance of the service resulted in the court finding a
transaction in goods within the scope of article 2. 272 This approach,
although not widely followed, exemplifies the broad application of article 2
beyond its express language, in accordance with the philosophy that the U.C.C.
is a true code. 273
Another approach is to apply article 2 only to the portion of a hybrid
transaction which involves goods. In Foster v. Colorado Radio Corp., 274 a
contract for the sale of a radio station involved a totality of assets of which
no more than ten percent were goods under article 2. 275 The court
therefore applied article 2 to those assets which were goods, and non-code law
was applied to the remaining assets. 276 Although this approach seems
equitable at first glance, it fails to promote uniformity and simplicity in
commercial transactions since different aspects of a transaction will be
subject to different bodies of law. 277
Despite the approach followed by Skelton and Foster a contrary common
law rule for dealing with hybrid sale/service contracts seems to have survived
enactment of the U.C.C. 278 Prior to adoption of the U.C.C. a contract was
examined to determine if it predominately involved the performance of services
or the sale of goods, and it was then classified according to the predominate
feature. 279 This approach is still the most frequently utilized analysis
when a court is faced with a contract involving both goods and services.280
Like the other approaches, this treatment of hybrid transactions also
fails to promote uniformity in commercial transactions. Additionally, it
creates a lack of predictability because whether a hybrid transaction is
designated as a sales contract or a service contract depends on the particular
facts of each transaction. 281 Consequently, this approach necessitates a
case by case approach which promotes a lack of uniformity and is inherently
Several other tests have also been developed by the courts to
determine if a contract involving both goods and services falls inside or
outside the scope of article 2. 282 In Bonebrake v. Cox, 283 the court
ascertained the main thrust of the transaction by examining the intent of the
parties. The transaction, which involved a contract to deliver and install
bowling equipment, was determined to be a contract for the sale of goods within
article 2 since the sale of the equipment, rather than its installation, was
found to be the main thrust of the contract. 284 In Lake Wales Publishing
Co. v. Florida Visitor, Inc. 285 a contract for printing pamphlets
was held to be covered by article 2. The court focused on the final product
resulting from the contract and concluded that since the end product,
pamphlets, fit the article 2 definition of goods, article 2 applied to the
contract despite the extensive printing services involved. 286 In Wivagg v.
Duquesne Light Co., 287 a printing shop owner sued a public utility for
damages to the owner's business due to a fire caused by faulty electrical
wiring maintained by the utility. The court determined solely on public policy
considerations that providing electrical service was sufficiently analogous to
a sale that article 2 applied. 288
The variety and amorphous nature of the analyses used to determine how to
treat hybrid sale/service transactions is a model of the lack of uniformity in
the law. 289 Eliminating this lack of uniformity was one of the motivating
forces behind enactment of the U.C.C. 290 An examination of how software
transactions, which typically involve the licensing of software provided with
various services, would be treated under the various analyses discussed above
strongly supports the extension of article 2 to such transactions.
G. Hybrid Transactions Involving Software
Software is usually supplied with support services to assist the software
user in utilization of the software. 291 Support services for mass-marketed
over-the-counter or canned software are typically provided in the form of an
accompanying looseleaf book or manual which explains in detail how to use the
software. Support services in this form should not alter the
designation of software as a good since the accompanying manual is itself a
However, complex software designed for a large computer system may require
more extensive support services. In addition to detailed manuals, personnel
provided by the software vendor will install and debug 293 the software and
train the software user's personnel in the operation of the software. 294
In this case the transaction involves both goods, in the form of software, and
services provided to use the software. In the majority of jurisdictions the
transaction will be classified as a contract involving goods or a service
contract depending upon which feature predominates. 295 If the
installation, training, and debugging are merely incidental to providing the
software, then the goods aspect will predominate and article 2 will apply.
However, it may be possible for the service aspects to be so extensive that a
court could conclude that they predominate and therefore find that the
transaction is a service contract outside the scope of article 2.
In RRX Industries the court was confronted with a software transaction
that involved both the sale of software and accompanying services. 296 The
seller contracted to install the software on the buyer's computer and to
correct any errors in the software discovered after installation. The seller
also agreed to train the buyer's employees in the operation of the software and
to upgrade the software in the future. 297 The system proved unreliable,
however, because the seller was unable to correct defects in the software. The
buyer successfully brought suit for breach of contract and was awarded general
and consequential damages. In affirming the award, the Ninth Circuit
noted that the district court's award of consequential damages under article 2
of the U.C.C. could only stand if the software was a good and the software
transaction was a contract for the sale of goods rather than a contract to
provide services. 298 The court then found that the sale of goods aspect,
the sale of the software, was the predominant feature of the transaction, with
the services being only an incidental part of the transaction. 299
Consequently, the Ninth Circuit found, under the predominate feature test, that
in this case the sale of software with accompanying services was a contract for
the sale of goods covered by article 2. 300
Alternatively, if the analysis used in Bonebrake is applied the main thrust
of the transaction will determine whether article 2 applies. 301 Typically
this analysis would lead to the conclusion that article 2 does apply since,
regardless of the quantum of support services provided, acquiring the software
will be the primary thrust of the transaction. If the final product resulting
from the transaction is the focus of the analysis, such as in Lake Wales
Publishing Co., article 2 would be applicable if the final product, a properly
installed and operating computer program, is a good. 302 If the
determination depends on public policy considerations, such as in Wivagg, the
determination of whether article 2 applies is uncertain. 303 A court
relying on Wivagg would only apply article 2 if it felt the transaction was
sufficiently analogous to a sale. Application of Foster would require
differentiating between the portion of the transaction involving goods and the
portion involving services. 304 Based on this approach article 2 could
apply to the software while the service aspects of the transaction would not be
subject to article 2. Finally, the determination that software is a good would
render article 2 applicable under Skelton regardless of the quantity of
support services involved. 305 The mere use of a good in a transaction is
all that Skelton required for the transaction to come within the scope of
Large computer systems, such as those used by a governmental agency or a
chain of nationwide retail stores, frequently require custom programming due to
the systems' size and the specialized tasks being computerized. Some companies
employ their own in-house personnel to do the programming, but frequently
outside consultants design and implement the necessary software. Although most
courts would probably determine that this involves a service contract, since
the service aspect predominates, a different conclusion is also possible
depending upon which analysis is used.
Despite substantial programming services, if the final product,
software, is a good, the Lake Wales analysis would require application of
article 2. 306 Likewise, under Skelton the fact that the programmer would
use computer hardware, which is a good, to create software makes article 2
applicable to the transaction. 307 If the analysis used in Bonebrake was
employed, the applicability of article 2 would depend upon whether the main
thrust of the transaction was determined to be providing services or the
creation of a specially manufactured good in the form of software. 308
Focusing on public policy considerations, as done in Wivagg, produces uncertain
results, 309 while reliance on Foster would apply non-article 2 law to the
service aspects of providing programming services. 310
An increasingly common form of computer use is time-sharing. Time-sharing
involves access to large computers containing large amounts of data or
extensive computing capability by small home computers or computer terminals
via telephone lines. The WESTLAW and LEXIS computer systems are examples of
such time-sharing. 311 A user pays WESTLAW or LEXIS for the right
to access the company's computer from a computer terminal or a small home
computer which communicates with the company's computer via a telephone line.
Although the user merely pays for access to the WESTLAW or LEXIS computers,
such access involves the use of software in the WESTLAW and LEXIS computer
systems. A similar type of computer use involves service bureaus. These bureaus
receive data from customers which is subjected to computer processing by the
service bureau with the resulting computer output being supplied to the
customer. 312 A typical example is a service bureau which receives employee
payroll data from a employer and utilizes a computer system to prepare payroll
checks and to compile yearly employee payroll records. In this case the
employer receives a tangible product in the form of payroll checks and employee
wage records which were created with the service bureau's computer hardware and
Time-sharing and the use of service bureaus involve a direct and indirect use
of software, respectively. Although courts have found such transactions to be
service contracts outside the scope of article 2, 313 the various analyses
applied to other transactions may produce different results. The Skelton
analysis would render article 2 applicable to both time-sharing and service
bureau transactions since both involved goods such as computers. 314 Lake
Wales focused on the final product and therefore under this approach article 2
may apply in some cases. 315 For example, if a service bureau produces
tangible output such as a typed report or a data compilation on a computer
diskette, article 2 will apply if the report or data compilation is a good
under article 2. Foster would require application of article 2 only to the
goods portion of the transaction. 316 The public policy approach
relied on by Wivagg 317 and the main thrust analysis of Bonebrake 318
would produce uncertain results while the predominate feature analysis 319
would probably result in article 2 not being applicable.
The various approaches that can be used to determine if a hybrid
transaction involving software is within the domain of article 2 fail to
promote uniformity since the application of article 2 depends on both the
factual circumstances and the test applied to the transaction. Rather than
having the applicability of article 2 depend on which legal analysis is
utilized, a decision that it is applicable to all software transactions would
allow uniform results. Such a decision would allow judicial extension of
article 2 to bailments and leases to be extended further to hybrid transactions
involving software. 320
The determination of whether article 2 is applicable to software transactions
is an important and timely question. The size of the computer industry coupled
with the exceptional growth of software markets has created an enormous
industry. The development of commercial law, as applied to this industry, will
be greatly affected by whether article 2 is applicable. The extension of
article 2 to software transactions will promote uniformity, predictability, and
commercial reality which are policies underlying the U.C.C. In contrast, if
software transactions fall outside the domain of article 2, the trend of
developing applicable law on a piecemeal basis, which varies from state to
state, will intensify. Such an approach would prove particularly troublesome
for the software industry which typically markets its products on a national
basis and would therefore have to comply with the individual laws of
The application of article 2 to computer software transactions depends upon
two conclusions. First, software must be within the article 2 definition of a
good. Second, non-sale software transactions, which typically involve licensing
of the right to use software, must be within the domain of article 2.
Looking beyond the confusing terminology that is endemic to the computer
industry, it can be seen that once software, which begins as an intangible
idea, is reduced to a tangible form embodied in a physical medium, such as a
diskette or magnetic tape, a good exists. The physical nature of the software
in this form makes it a 'movable' thing as required by the article 2 definition
of a good. The existence of intellectual property aspects in the software,
typically subject to copyright or trade secret protection, does not divest the
software embodied in a tangible medium of its status as a good. The software in
this form is simply a good that embodies intellectual property aspects. A
contrary result, if applied to all goods, would result in a substantial number
of products traditionally viewed as goods under article 2, being removed from
the domain of article 2. Books, telephones, automobiles, clothing, food
products and innumerable other products, universally viewed as goods, frequently
embody various forms of intellectual property. Therefore, if the existence of
intellectual property aspects in a product eliminated its status as a good, the
scope of article 2 would be severely limited. Consequently, the determination
that software embodied in a tangible medium is a good seems inescapable.
Even if software is a good, however, the extension of article 2 to
typical software licensing transactions must be established. Strict statutory
construction of article 2 would limit its scope to sales, and therefore non-
sale software licensing transactions would be beyond the reach of article 2.
However, an increasing number of jurisdictions have extended article 2 to non-
sale transactions such as leases and bailments. This extension has been based
on a desire to apply article 2 to a growing class of transactions that are
analogous or equivalent to sales, but used for tax or other financial reasons.
The same logic supports extension of article 2 to software licensing since such
transactions are also analogous if not equivalent to sales. Typically,
software is licensed to preserve rights under the copyright law and to aid in
maintaining the confidentiality of underlying proprietary information contained
in the software. Therefore, the extension of article 2 to software license
transactions is consistent with the extension, by some courts, of article 2 to
leases and bailments.
Extending article 2 to hybrid software license transactions which involve
software, which is a good, and accompanying services is more troublesome. In
dealing with the analogous situation of hybrid transactions involving both
sales and services, the courts have developed a variety of different analyses,
which produce differing results. Application of these analyses to hybrid
software transactions such as licensing of software with support services,
custom programming, time-sharing arrangements, or service bureau contracts
produce different results depending on the analysis used. This uncertainty can
be eliminated by extending article 2 to all transactions involving goods. Such
a uniform extension, which already occurs under some of the above analyses, is
justifiable if the U.C.C. is viewed as a true code. This expansive approach is
required if article 2 is to have any lasting vitality in contemporary
commercial markets which are increasingly resorting to non-sale transactions in
lieu of traditional sales transactions.
1. See D. BENDER, COMPUTER LAW: EVIDENCE AND PROCEDURE section
4B.01-4B.15 at 4B-2 to 4B-119 (1984) (discussion of numerous computer applications).
2. See infra note 66 for background with regard to computers.
3. The computer industry has been one of the fastest growing parts of the
United States economy. Average annual growth rates for companies in this
industry have been 11.1% for the twenty-five year period ending in 1980.
Additionally, very few businesses can be successful without some type of
computer assistance. Note, U.C.C. Section 2-719 as Applied to Computer
Contracts - Unconscionable Exclusions of Remedy?: Chatlos Systems, Inc. v.
National Cash Register Corp., 14 CONN. L. REV. 71, 93 & n.100 (1981). The
industry is expected to continue growing. The number of computers in use is
expected to increase by a factor of ten during the next decade. Reed, Decade's
Top Jobs - Where to Write for Details on 20 Fastest-Growing Careers, N.Y. Times,
Oct. 13, 1985, at 17J.
4. According to one estimate there may be 10 million small home computers in
use by 1990. Samuelson, Our Computerized Society, NEWSWEEK, Sept. 9, 1985 at
73. One expert has predicted that in the business world everyone will have a
micro-computer on their desk within the next ten years. Bulkelui, Adapting to
Computer Age Sends Executives to School, Wall St. J., Jan. 28, 1981, at 31,
5. For example, in Cagle v. Boile Mortgage Co., 261 Ark. 437, 549 S.W.2d
474 (1977), the court cancelled a $28,000 note and mortgage because a computer
error resulted in a usurious rate of interest being unintentionally charged.
But see First American Nat. Bank v. McClure Construction Co., 265 Ark. 792,
581 S.W.2d 550 (1979) (same court reached opposite result on similar facts).
Computer software errors have also caused many other problems that may give
rise to substantial liability. For example, such errors have caused near misses
between commercial airliners, an unintended closing of a nuclear power plant,
and false warning of impending military attacks. See Gemignani, Product
Liability and Software, 8 RUTGERS COMPUTER & TECH. L.J. 173, 173 (1981).
See also Brannigan & Dayhoff, Liability for Personal Injuries Caused By Defective
Medical Computer Programs, 7 AM. J. L. & MED. 123 (1981) (article examines
potential for liability arising from use of computers in field of medicine);
Freed, Products Liability in the Computer Age, 12 FORUM 461, 462
(1977) (article examines application of products liability law to software).
See generally Nimmer & Krauthaus, Computer Error and User Liability Risk, 26
JURIMETRICS J. 121 (1986) (examination of the liability risks arising from
widespread reliance on computers).
6. It should be noted that software is a term subject to numerous definitions
and meanings. See infra notes 54, 56. However, for purposes of this article,
software and computer program are used interchangeably to refer to a computer
program that is embodied in a tangible medium. For a detailed explanation of
what software is and how it is created, see infra note 57. The protection of software
with traditional intellectual property law concepts exemplifies the legal difficulties in
dealing with software. Early attempts to protect software successfully relied on trade
secret law. Bender, Trade Secret Protection of Software, 38 GEO. WASH. L. REV. 909
(1969). This approach was practical in the early days of computers when systems were so
expensive that their use was limited to a small number of users. Under these circumstances
the creator of the software could scrupulously maintain the software in secret and require
the limited number of customers to use the software under a
confidential license. The widespread use of computers due to tremendous
increases in reliability, coupled with drastic size and cost reductions
eliminated reliance on trade secret law for many types of software which became
widely disseminated. The patent law (35 U.S.C. section 1 et seq. (1982)) was viewed as
an alternate source of protection since it did not depend on secrecy or limited confidential
disclosure. A landmark Supreme Court decision, Diamond v. Diehr, 450 U.S. 175 (1981),
established that a unique manufacturing method which involved use
of a computer was patentable. However, a careful reading of Diamond and
subsequent lower court decisions limit the scope of the patent law and leave
the parameters of available protection unclear. See Milde, Life After Diamond
v. Diehr: The CCPA Speaks Out on the Patentability of Computer-Related Subject
Matter, 64 J. PAT. OFF. SOC'Y 434 (1982) (discussion of decisions subsequent
to Diamond). Software protection was also sought under the copyright law (17 U.S.C.
section 101 et seq. (1982)) but the applicability of copyright to software was widely
disputed. The copyright act of 1976 was amended in 1980 to clarify its coverage
of software. However, the availability of copyright protection for software was
not unequivocally established until the Third Circuit reversed the district
court in Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d
Cir. 1983), and extended copyright protection to all forms of software.
Despite the availability of traditional forms of intellectual property
protection for computer technology, Congress recognized the need for a new form
of protection. This new type of protection embodied in the Semi-Conductor Chip
Protection Act, Pub. L. 98-260, Title III, 98 Stat. 3347 (1984) (codified
at 17 U.S.C. sections 901-904), grants the creator of a new chip or micro-
processor the right to control the use and production of the new chip or micro-
processor for a limited time. The difficulties with regard to how to protect software led
Congress to appoint a commission to study the problems of protecting software. See Pub.
L. No. 93-573, 88 Stat. 1873 (1974) (establishing National Commission on New
Technological Uses of Copyrighted Works). The final report of the Commission,
reproduced in 3 COMPUTER L.J. 53 (1981-82), led to amendment of the
copyright law. See Computer Software Act, Pub. L. No. 96-517, sections 10(a)-10(b),
94 Stat. 3015, 3028 (1980) (codified as amended at 17 U.S.C. sections 101 and
117 (1982)). The treatment of software under the tax law has also been
unclear. Jurisdictions vary to some extent with regard to whether software is
subject to the same taxes as hardware. See Comment, Software Taxation: A
Critical Reevaluation of the Notion of Intangibility, 1980 B.Y.U.L. Rev. 859
(arguing software is tangible for tax purposes). See also note 91 infra.
A general discussion of the legal issues created by the computer industry
appears in Schmidt, Legal Proprietary Interests in Computer Programs: The
American Experience, 21 JURIMETRICS J. 345 (1981).
7. It was estimated that 80% of all expenditures for computer goods and
services in the United States were for software by the late 1970's, in contrast
to the late 1950's when only 40% of total expenditures were for software.
Semple, The Legal Incidents of Computer Software and Its Use as Collateral in
Secured Transactions, 7 CANADIAN BUS. L.J. 450 n.1 (1982-83).
8. As of 1982, Burroughs Corporation, a major manufacturer of computers, had
more than 250 lawsuits pending against them, brought by dissatisfied purchasers
of their computers. Holmes, Application of Article Two of the Uniform
Commercial Code to Computer System Acquisitions, 9 RUTGERS COMPUTER &
TECH. L.J. 1, 4 n.10 (1982). The frequency with which suits are brought for inoperative
software and data processing errors has created a new industry. At least four insurance
companies offer data processing errors and omissions policies to computer companies.
These policies cover claims resulting from negligent errors or omissions committed in the
formulation of software or other related activities. Who Ya
Call? Byte Busters Insure Computer Risks, 1 Computer L. Strategist at 3
(Dec. 1984). Additionally, in one suit in which a computer buyer successfully sued the
seller because the computer failed to operate properly, a new tort of 'computer
malpractice' was advanced but rejected by the court. Chatlos Systems v.
National Cash Register Corp., 479 F. Supp. 738, 740-41 n.1 (D.N.J. 1979).
9. The importance of this question caused the Committee on Computer Law (via
its Sub-committee on Commercial Liability) of the Association of the Bar of the
City of New York to study the question of whether software is within the domain
of article 2 of the U.C.C. The committee's report conclusively determined that
software was a good under article 2 and that software transactions, which are
typically non-sale transactions, should be governed by article 2. The report is
published in 40 THE RECORD 754 (1985). Additionally, the U.C.C. Committee of
the American Bar Association Section of Corporation, Banking & Business Law has
formed a subcommittee to examine the scope of the U.C.C. with regard to
computer software, among other things. See Chairman's message, 41 BUS. LAW.
2 (Feb. 1986). Commentators have had differing views on this question. See
Davidson, Negotiating Major System Procurements, 3 COMPUTER L.J. 385, 400
(1982) (considerable debate and confusion has arisen from the question of
whether software is a good under article 2); Semple, supra note 7, at 457
(status of software under article 2 has been judicially considered but never
squarely decided); Compare Note, The Warranty of Merchantability and Computer
Software Contracts: A Square Peg Won't Fit in a Round Hole, 59 WASH. L. REV.
511 (1984) (software is an intangible and therefore not within the scope of
article 2) with Note, Computer Programs as Goods Under the U.C.C., 77
MICH. L. REV. 1149 (1979) (software embodied in a tangible medium is within the
scope of article 2); See generally R. BERNACCHI & G. LARSEN, DATA
PROCESSING CONTRACTS AND THE LAW 137-39 (1974) (arguing that article 2
should apply to data processing transactions); D. BRANDON & S. SEGELSTEIN,
DATA PROCESSING CONTRACTS, 109-10 (1976) (applicability of article 2 to
software licenses questionable since software user does not obtain title or ownership of
the software); Brooks, Systems Contracts, 1981 COMPUTER LAW 161, 201-16
(discussion of the applicability of article 2 to computer transactions);
Davidson, Project Control in Computer Contracting, 4 COMPUTER L.J. 133, 136
(1983) (most software licenses are drafted as if the U.C.C. applied even though
such application is unclear); Holmes, Application of Article Two of the
Uniform Commercial Code to Computer System Acquisitions, 9 RUTGERS
COMPUTER & TECH. L.J. 1 (1982) (discussing the application of article 2 of the U.C.C.
to computer transactions generally); Raysman, Warranty Disclaimer in the Data
Processing Contract, 6 RUTGERS J. COMPUTERS TECH. & L. 265 (1978) (courts
have generally agreed that the U.C.C. applies to sale of computer hardware, but
application to software unclear). It should be noted that the focus of this article is limited
to the question of whether article 2 applies to computer software. The consequences of
whether article 2 applies are not dealt with in detail. See generally Nycum, Liability for
Malfunction of a Computer Program, 7 RUTGERS J. COMPUTERS TECH. & L. 1, 2-7
(1979) (discussion of the consequences of applying article 2 to software); see notes 14,
15-21 infra and accompanying text with regard to the consequences that flow from
deciding that article 2 does or does not apply to software.
10. Although only limited attempts have been made to resolve the question of
whether article 2 is applicable to software, see supra note 9, numerous
commentators have recognized the importance of the question. See, e.g.,
McGonigal, Application of Uniform Commercial Code to Software Contracts, 2
Computer L. Serv. Rep. (Callaghan) 117 (1978) ('whether article 2 of the
Uniform Commercial Code . . . applies to computer software contracts should be
of great concern to the contract draftsmen, especially in the areas of implied
warranties, consequential damages, disclaimers and limitations on liability,
and taxes in those states which distinguish between goods and services for
purpose of sales tax.'); Nycum, supra note 9, at 2 (the author states '[at
this time no one knows for certain what law would govern a contract for a
computer program.' She then examines the importance of this question in light
of the different remedies available depending on whether article 2 of the
U.C.C. applies.). The question of whether article 2 is applicable to software
has also been raised in judicial decisions. See, e.g., RRX Industries v. Lab-
Con, Inc., 772 F.2d 543 (9th Cir. 1985). Additionally, the importance of
applying article 2 to commercial transactions in general is evidenced by
numerous suits in which the scope of article 2 was an important question. See,
e.g., infra notes 175 and 176.
11. Bender, Software Protection: The 1985 Perspective, 7 W. NEW ENG. L.
REV. 405, 407 n.3 (1985).
12. Id. at 408; Reiling & Lester, Marketing Software Products, 8 AM. PAT.
L.Q.J. 294, 294 (1980).
13. Bender, supra note 11, at 408 n.4. As early as 1978 an estimated 15,000
programs were being written per day in the United States. C. TAPPER, COMPUTER
LAW 13 (1985). Software is being created for the United States government at
the rate of $10 billion worth each year and corporations spend an average of
one-third of their net profits on data processing services. Additionally,
software expenditures exceed hardware expenditures today. E. KEET, PREVENTING
PIRACY: A BUSINESS GUIDE TO SOFTWARE PROTECTION 3 (1985).
14. This same rationale has been applied to lease transactions. Some courts
have applied article 2 to leasing transactions to avoid having non-article 2
law applicable to equipment leasing while article 2 applied generally to sale
transactions. See Hertz Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753
(Ky. Ct. App. 1982); Hertz Commercial Leasing Corp. v. Trans. Credit Clearing
House, 59 Misc. 2d 226, 298 N.Y.S.2d 392 (Civ. App. 1969), rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970).
The consequences of finding a particular transaction outside the scope of
article 2 are illustrated by several commentators who have examined the
differences between the common law of contracts and contract law under article
2. See Hawkland, Major Changes Under the Uniform Commercial Code in the
Formation and Terms of Sales Contracts, 10 PRAC. LAW. 73 (1964); Note,
The Uniform Commercial Code and Contract Law: Some Selected Problems, 105
U. PA. L. REV. 837 (1957). See also J. WHITE & R. SUMMERS, UNIFORM
COMMERCIAL CODE 23 (1980) (contracts easier to form under article 2 because article
2 reduces common law formalities, imposes a wider range of obligations than the common
law, and supplies missing terms that might prevent contract formation
under the common law).
15. See, e.g., Grogan, Winning the Battle of the Forms in Product
Distribution, COMPUTER L. ANN. 247, 249-50 (1985).
16. See id; See also J. CALAMARI & J. PERILLO, CONTRACTS 68 (1977) ('the
common law rule is that a purported acceptance which adds qualifications or
conditions even as to a trivial detail operates as a counter-offer and thereby
a rejection'). In Wagner v. Rainier Mfg., 230 Or. 531, 538, 371 P.2d 74, 77 (1962), the
court stated that 'acceptance [of an offer must be 'positive, unconditional,
unequivocal and unambiguous, and must not change, add to, or qualify the terms
of the offer."
17. Strict application of the common law acceptance rule by the courts has
proven detrimental to commerce since most business transactions today are
consummated by an exchange of printed forms which usually contain different
ancillary terms. J. CALAMARI & J. PERILLO, supra note 16, at 68.
18. See U.C.C. s 2-207. For a discussion of the operation of s 2-207, see J.
WHITE & R. SUMMERS, supra note 14, at 24-39. See also Grogan, supra note 15, at
250, which notes that s 2-207 was intended to deal with typical everyday
commercial transactions which involve printed forms.
19. Under the common law an enforceable contract must generally contain terms
specifying subject matter, price, payment terms, quantity, quality, duration
and work to be done. J. CALAMARI & J. PERILLO, supra note 16, at 43-44 & n.17
20. See, e.g., U.C.C. s 2-305 (open price term); U.C.C. section 2-308 (place of
delivery not specified); U.C.C. section 2-309 (time for performance not specified);
U.C.C. section 2-312 (warranty of title term omitted). This general principle is best
stated in U.C.C. section 2-204(3): Even though one or more terms are left open a
contract for sale does not fail for indefiniteness if the parties have intended to make a
contract and there is a reasonably certain basis for giving an appropriate remedy.
See also J. WHITE & R. SUMMERS, supra note 14, at 104-36 (general discussion
of 'gapfiller' provisions contained in article 2 of the U.C.C.).
21. See U.C.C. section 1-205 (dealing with course of dealing and use of trade);
U.C.C. section 2-308 (dealing with absence of specified place of delivery). See also
U.C.C. section 1-102(2)(b), which states that one of the purposes of the U.C.C. is
'to permit the continued expansion of commercial practices through custom,
usage and agreement of the parties.' See generally J. WHITE & R. SUMMERS, supra
note 14, at 98-104 (general discussion of how performance by the parties and
usage in the trade is treated under article 2).
22. U.C.C. section 1-102(2)(c) states that one of the underlying policies of the
U.C.C. is 'to make uniform the law among the various jurisdictions.' The
General Comment of National Conference of Commissioners on Uniform State Laws
and the American Law Institute, which appears in 1 U.L.A.--U.C.C. at XV (1976),
states 'uniformity throughout American jurisdictions is one of the main objectives of this
code.' But see Taylor, Uniformity of Commercial Law and State-By-State Enactment: A
Confluence of Contradictions, 30 HASTINGS L.J. 337 (1978) (discussing how total
uniformity has not been realized).
23. See, e.g., LA. REV. STAT. ANN. sections 51:1961 to 51:1966 (West Cum. Supp.
1986) and Software License Enforcement Act, ILL. REV. STAT. ch.29, sections 801-08
(Supp. 1986), which both statutorily enforce sale of software via shrink-wrap or tear-me-open
licenses. Similar statutes have been proposed in Hawaii,
Arizona and California. Sherman, Shrink-wrap Licensing of Computer Programs,
1985 COMPUTER L. INST., 541, 556. See infra note 244 and accompanying text for
definition of shrink-wrap and tear-me-open licenses. See also Legislation, 2
COMPUTER LAW. 31 (August 1985) (pending legislation in California would require
that manufacturers and retailers of consumer computer products offer
warranties; pending legislation in New York state would provide that all home
computers sold in New York state be covered by a warranty).
24. Such a prediction is very likely when technology and the law is involved.
For example, the various United States Courts of Appeal, applying the same
patent law (35 U.S.C. section 1 et seq. (1982)) to various new technologies, were
unable to interpret the law uniformly. For example, in Moore v. Shultz, 491
F.2d 294, 300 (10th Cir.), cert. denied, 419 U.S. 930 (1974), the court said
that it was a question of fact whether 35 U.S.C. section 103 was satisfied, while
Swofford v. B.W., Inc., 395 F.2d 362, 367-68 (5th Cir. 1968), said it was a
question of law whether 35 U.S.C. s 103 was satisfied. The extent of the
non-uniformity and its impact on businesses operating on a nation-wide basis
was so severe that Congress radically altered the federal court structure with
regard to the patent law. All appeals in patent cases are now heard by the
newly created United States Court of Appeals for the Federal Circuit, in lieu
of the various United States Courts of Appeal which previously had jurisdiction
over such cases. See Federal Courts Improvement Act of 1982, Pub. L. No. 97-
164, 96 Stat. 25, 37 (1982) (codified at 28 U.S.C. section 1295(a)).
25. The entire U.C.C. has been adopted by forty-nine states and by the
District of Columbia and the Virgin Islands. Louisiana has only adopted
articles 1, 3, 4, and 5 of the U.C.C. 1 U.L.A.--U.C.C. at III (1976).
26. See U.C.C. section 1-102. See also Nanakuli Paving and Rock Co. v. Shell Oil
Co., 664 F.2d 772 (9th Cir. 1981) (underlying purpose of U.C.C. is to permit
commercial usage to be liberally interpreted); Cleveland Lumber Co. v. Proctor
and Schwartz, Inc., 397 F. Supp. 1088 (N.D. Ga. 1975) (purpose of U.C.C. is
to make commercial law uniform and predictable); Community Bank v. Jones,
278 Or. 647, 566 P.2d 470 (1977) (purpose of U.C.C. is to promote
consistency and predictability in commercial transactions); A. M. Knitwear
Corp. v. All America Export-Import Corp., 390 N.Y.S.2d 832, 41 N.Y.2d 14,
359 N.E.2d 342 (1976) (main purpose of U.C.C. is to simplify, modernize and
clarify commercial law); Pacific Products, Inc. v. Great Western Plywood,
Ltd., 528 S.W.2d 286 (Tex. Civ. App. 1975) (objective of U.C.C. is to
provide a comprehensive set of rules for governing commercial transactions in
place of different rules established by the different legislative and
decisional law of different states).
27. See U.C.C. section 2-102 (article 2 applies to 'transactions in goods');
U.C.C. section 2-105(1) (defines 'goods' for purposes of article 2). See infra notes
47 and 48 for full text of sections 2-102 and 2-105(1). See infra text
accompanying notes 47-141 for detailed discussion of whether software is a good
under article 2.
28. Although sales are within the domain of article 2, the extension of
article 2 to nonsale transactions depends upon the particular type of
transaction and the jurisdiction involved. See infra text accompanying notes
142-320 for a detailed discussion of transactions within the scope of article
29. See infra notes 54-56 and accompanying text.
30. Prior to 1969 computer hardware and software were sold via a 'bundled
transaction' in which the buyer paid the same price for the hardware whether he
wanted the software and programming services or not. Antitrust considerations
led to unbundling of hardware and software, and today each is generally sold
separately. See Bender, supra note 11, at 411 n.11; Semple, supra note 7, at
450 n.2; Note, 59 WASH. L. REV. 511, supra note 9, at 512-13 n.9.
31. Custom software is a program specially designed and created for a computer
user. Typically, very complex computer systems may require such custom software
since standard software may not meet the needs of the computer user. See Nycum,
Legal Aspects of Custom Developed Software in COMPUTER SOFTWARE 1984:
PROTECTION AND MARKETING 649. However, the cost of custom software has led
to a reduced market for it. See Brooks, Acquisition and Exploitation of Custom
Software, in Id. at 695; See also Note, U.C.C. Section 2-719 as Applied to
Computer Contracts--Unconscionable Exclusions of Remedy?: Chatlos Systems, Inc.
v. National Cash Register Corp., 14 CONN. L. REV. 71, 107 n.186
(1981) (computer vendors usually provide standard software in lieu of custom
programming); D. BENDER, supra note 1, section 3.02(4) at 3-9 (noting disadvantages
of custom software, as opposed to standard software).
32. These software producers, usually referred to as software houses, provide
only software and compete in the software market with companies that provide
both hardware and software. Note, 59 WASH. L. REV. 511, supra note 9, at
513. The growth of the software market for these software houses has expanded
dramatically to the point where the software market is larger than the hardware
market today. D. Bender, supra note 11, at 41.
33. The slow evolution of the law coupled with the conservative nature of
judges and attorneys is problematic when dealing with rapidly changing computer
technology. T. HARRIS, THE LEGAL GUIDE TO COMPUTER SOFTWARE
PROTECTION: A PRACTICAL HANDBOOK ON COPYRIGHTS, TRADEMARKS,
PUBLISHING AND TRADE SECRETS 37 (1985).
34. Intellectual property rights may exist in software pursuant to copyright
and trade secret law. The form of the expression of the software is considered
a literary work protectable via copyright. See 17 U.S.C. sections 101-102
(1982). Additionally, underlying ideas upon which the software is based may be
trade secrets protectable by maintaining the software as confidential material.
See Cybertek Computer Prods., Inc. v. Whitfield, 203 U.S.P.Q. 1020, 1022
(Cal. Super. Ct. 1977) (trade secret protection applicable to software in
practically all jurisdictions); J. & K. Computer Sys., Inc. v. Parrish, 642
P.2d 732, 735 (Utah 1982) (trade secret protection appropriate for software
intended to be kept confidential).
35. Software is distributed to users embodied in a variety of physical
mediums. For example, a program may be stored on punched paper cards or paper
tape. Today programs are more commonly contained on magnetic tape, or on a
small plastic device called a disk or diskette. Additionally, a program may be
contained in a small electronic device such as a read-only memory or ROM. See
Stern, Section 117 of the Copyright Act: Charter of the Software Users'
Rights or an Illusory Promise?, 7 W. NEW ENG. L. REV. 459, 462 n.20 (1985);
Taphorn, Software Protection in the International Marketplace, 10 N.C.J.
INT'L L. & COM. REG. 617, 619 (1985); Comment, Copyright Protection for
Computer Programs in Object Code in ROM, 10 N.C.J. INT'L & COM. REG. 667, 669
(1985) (software stored on punched cards, magnetic tape or floppy disk); and
the dissent of Commissioner Hersey to the final report of the National
Commission in New Technological Uses of Copyright Work, reproduced in 3
COMPUTER L.J. 53, 87 (1981-82). See also infra note 66.
36. See infra note 52.
37. See infra note 144 with regard to software license transactions.
38. See infra text accompanying notes 145-176 for a discussion of whether
article 2 of the U.C.C. is a code or a statute.
39. See infra text accompanying notes 177-95 for a discussion of the extension
of article 2 to leases and bailments.
40. See infra text accompanying notes 266-290 for a discussion of the various
judicial analyses applied to hybrid transactions involving both sale and
41. Software is often provided with support services such as installing the
software in the user's computer and educating the user in the operation of the
software. Improved versions of the software will often be provided to the user
and any latent defects in the software will be corrected for the user. See
Note, 77 MICH. L. REV. 1149, supra note 9, at 1158-61.
42. See supra note 31.
43. See infra note 311 and accompanying text.
44. See infra note 312 and accompanying text.
45. See U.C.C. s 1-102(1) and 1-102(2) (1978).
46. See Hertz Commercial Leasing Corp. v. Transportation Credit Clearing
House, 59 Misc. 2d 226, 228-29, 298 N.Y.S.2d 392, 395 (N.Y. Civ. Ct. 1969),
rev'd on other grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (N.Y. App. Term
1970) (equipment leasing is a recent device widely used as a substitute for a
sales transaction that is really equivalent to a sale); Note, Commercial
Law: Uniform Imposition of the Risk of Loss in Equipment Leasing, 37 OKLA. L.
REV. 317, 317 (1984) (lease arrangements are often used today to acquire goods
or equipment instead of outright purchases). See also, Davies, Equipment
Leasing: A Decade of Growth, 1983 LLOYD'S MARITIME & COMM. L.Q. 631, 631
(notes the tremendous growth, in both the United States and Great Britain, of
47. U.C.C. section 2-102 states:
Unless the context otherwise requires, this Article applies to transactions in
goods; it does not apply to any transaction which although in the form of an
unconditional contract to sell or present sale is intended to operate only as a
security transaction nor does this Article impair or repeal any statute
regulating sales to consumers, farmers or other specified classes of buyers.
U.C.C. section 2-102 (1978).
48. U.C.C. section 2-105(1) states:
'Goods' means all things (including specially manufactured goods) which are
movable at the time of identification to the contract for sale other than the
money in which the price is to be paid, investment securities . . . and things
in action. 'Good' also includes the unborn young of animals and growing crops
and other identified things attached to realty as described in the section on
goods to be severed from realty (Section 2-107).
U.C.C. section 2-105(1) (1978).
49. See supra note 9. The scope of article 2 with regard to transactions in
general is also unclear. For example, compare Hertz Commercial Leasing Corp. v.
Transp. Credit Clearing House, 55 Misc. 2d 226, 298 N.Y.S.2d 392 (N.Y.
Civ. Ct. 1969), rev'd on other grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585
(N.Y. App. Term 1970) (scope of article 2 is broader than just sales and
therefore the court said article 2 applied to commercial equipment leases) with
Bona v. Graefe, 264 Md. 69, 73, 285 A.2d 607, 609 (1972) (article 2 does not
apply to a bailment because express wording of article 2 limits its application
to sales). See also Skelton v. Druid City Hosp. Bd., 459 So. 2d 818 (Ala.
1984) (court noted that article 2 applies to transactions in goods, which is
broader than sale of goods, and applied section 2-315 of article 2 to services
of a surgeon who stitched up a patient); Note, The Extension of Article 2 of
the Uniform Commercial Code to Leases of Goods, 12 TULSA L.J. 556, 564-65
(1977) (although author argues article 2 should be extended to leases, author
believes wording 'transactions in goods' in section 1-102 of article 2 was an
inadvertent error and draftsmen intended to use term 'sales' in place of
'transactions'). But see Comment, Application of Article 2 of the Uniform
Commercial Code to Leases, 1969 WASH. U.L.Q. 90 (concluding that article 2
should not extend to leases).
50. 292 Pa. Super. 346, 437 A.2d 417 (1981).
51. Id. at 350. See also Lakeside Bridge & Steel Co. v. Mountain State Constr.
Co., 400 F.Supp. 273, 277 (E.D. Wis. 1975) (court found that whether
something is movable is the crucial element in determining if it is a good
subject to article 2). Based on the finding in Lakeside, software embodied
in a physical medium, such as a diskette, is clearly a good under article 2
since it is movable.
52. Lakeside Bridge & Steel Co. v. Mountain State Constr., Inc., 400 F.
Supp. 273, 277 (E.D. Wis. 1975) (structural materials sold and shipped to dam
site where they were permanently installed); Gulf Coast Fabricators, Inc. v.
Mosley, 439 So. 2d 36, 38 (Ala. 1983) (prefabricated building); Morrow v.
New Moon Homes, Inc., 548 P.2d 279, 287 (Alaska 1976) (mobile homes); Moore
v. Burt Chevrolet, Inc., 39 Colo. App. 11, 12, 563 P.2d 369 (1977) (used
goods); Capital Assoc., Inc. v. Hudgens, 455 So. 2d 651, 658 (Fla. Dist. Ct.
App. 1984) (video games and juke boxes); Cardozo v. True, 342 So. 2d 1053,
1055 (Fla. Dist. Ct. App. 1977) (books); Moridge Mfg. Co. v. Butler, 451
N.E.2d 677, 680 (Ind. Ct. App. 1983) (distributorship agreements for grain
dryers); Helfey v. Warbash County REMC, 151 Ind. App. 176, 179, 278 N.E.2d
608, 610 (1972) (electricity); Burton v. Artery Co., 279 Md. 94, 97, 367
A.2d 935, 937 (1977) (trees, shrubs and sod); Burnham v. Mark IV Homes, Inc.,
387 Mass. 575, 581, 441 N.E.2d 1027, 1033 (1982) (modular homes); Guaranteed
Foods of Neb., Inc. v. Rison, 207 Neb. 400, 406, 299 N.W.2d 507, 511
(1980) (groceries and food products); Silverman v. Alcoa Plaza Assoc., 37
A.D.2d 166, 323 N.Y.S.2d 39, 45 (App. Div. 1971) (shares of cooperative
apartment stock); Lobianco v. Property Prot., Inc., 292 Pa. Super. 346, 350,
437 A.2d 417, 419 (1981) (installation of burglar alarm system). See generally
State Dept. of Revenue v. Northern T.V., Inc., 670 P.2d 367, 371 (Alaska
1983) (noting the broad definition of goods in many areas of the law, the court
said sale of air time to broadcast T.V. program was sale of goods under Alaska
Business License Act).
53. Senior Judge Bazelon of the United States Court of Appeals for the
District of Columbia has stated that our legal system suffers from technical
illiteracy. Bazelon, Coping With Technology Through The Legal Process, 62
CORNELL L. REV. 817, 817 (1977). See also Holmes, supra note 8, at 2-3
(inability of judges and lawyers to understand computerese has caused confusion
with regard to whether article 2 applies to computer acquisitions).
54. See, Note, Contracting for Performance in the Procurement of Custom
Computer Software, 13 GOLDEN GATE U.L. REV. 461, 461, 462-63 (1983) (because
of disagreement among experts with regard to meaning of computer terminology parties
to a computer contract should agree on applicable definitions and
include such definition in the contract); see also D. BENDER, supra note 1, section
2.06 at 2-112.4 (software defined differently by different authors); T. HARRIS,
supra note 33, at 33 ('the rather elusive term software as used by those in
the computer industry may refer to several distinct conditions or elements of a
total package.'); Bender, supra note 11, at 407 (software defined differently
by different authors); McGee, Financial and Tax Accuretiey for Computer
Software, 7 W. NEW ENG. L. REV. 651, 654 (1985) (no single accepted definition
of software); Tunick, Computer Law: An Overview, 13 LOY. L.A.L. REV. 315,
317 n.15 (1980) (no generally accepted definition of 'software in computer
industry.'); Semple, supra note 7, at 451 ('a general definition of software is
of little use because of the diversity and breadth of meaning encompassed by
the word'); Note, 77 MICH. L. REV. 1149, supra note 9, at 1164 n.74
(software has no exclusive definition).
55. Honeywell Inc. v. Lithonia Lighting Inc., 317 F. Supp. 406, 408 (N.D.
Ga. 1970). See also Note, 14 CONN. L. REV. 71, supra note 3, at 102 ('it is
a well-known fact that computer people speak a highly technical language that
is incomprehensible to the layman').
Additionally, in the manual accompanying one computer, the manufacturer stated
that '[probably few people in the history of the world have done a better job
of making themselves incomprehensible than computer scientists.' FRANKLIN ACE
100 USER REFERENCE MANUAL at 1-7 (1982).
56. See, e.g., Teamsters Sec. Fund of Northern California, Inc. v. Sperry Rand
Corp., 6 Comp. L. Serv. Rep. (Callahan) 951, 957 (N.D. Cal. 1977) (software is
set of instructions, recorded on media such as magnetic tapes or disks, that is
read into computer through hardware devices such as tape or disk drives); Telex
Corp. v. IBM, 367 F. Supp. 258, 274 (N.D. Okla. 1973), modified, 510 F.2d
894 (10th Cir. 1973), cert. dismissed, 423 U.S. 802 (1975) (computer
program, often referred to as software, is series of instructions for
computer); First Nat'l Bank v. Dept. of Revenue, 85 Ill. 2d 84, 86, 421
N.E.2d 175, 177 (1981) (software broadly defined to include the information,
usually on magnetic tapes, disks or punched cards, supplied with computer plus
flowcharts, instruction manuals, and counseling and expert engineering
assistance furnished by the software seller). See also D. CANNON & G. LUECKE,
UNDERSTANDING MICROPROCESSOR G-4 (1979) (software is a set of computer
programs, procedures, and in some cases documentation, concerned with the
operation of a computer system); T. HARRIS, supra note 33, at 22 (software is
programs that enable computers to accomplish tasks); J. ROSENBERG, DICTIONARY
OF COMPUTER 488 (1984) (software includes computer programs, documents,
procedures, and user's manuals); I. SINCLAIR, INSIDE YOUR COMPUTER 107 (1983)
(software, also called computer programs, are instructions that tell the computer what to
do); Ross, The Patentability of Computer 'Firmware', 59 J. PAT. OFF. SOC'Y 731, 736
(1977) (computer programs collectively referred to as
software); Comment, 1980 B.Y.U.L. Rev. 859, supra note 6, at 859 n.2
(software does not include documentation, manuals, or support services); Note,
Computer Software and Tax Policy, 84 COLUM. L. REV. 1992, 1992 n.1
(1984) (author defines software to be the tapes or disks on which computer
programs are embodied and excludes documentation from definition of software);
Note, Strict Products Liability in Computer Software Caveat Emptor, 4
COMPUTER L.J. 373, 374 n.1 (1983) (author defines 'computer program' to be
instructions that control computer in contrast to 'software' which author
defines as the tangible item containing the computer program); Note, 59
WASH. L. REV. 511, supra note 9, at 511 (software is an intangible collection
of ideas comprising detailed instructions which tell a computer what to do).
Software has been defined as comprising three components. The first component
is the 'program' which is a series of instructions understandable to a computer
and capable of achieving a certain result. The second component is the 'data
base' which is the physical representation of the data to be acted upon by the
computer. The third component is the 'documentation' which comprises all the
documents that explain or describe the operation of both the software and the
hardware. D. BENDER, supra note 1, section 2.06(1) at 2-112.4.
The United States Bureau of Standards defines software as '[computer programs,
procedures, rules, and possibly associated documentation concerned with the
operation of a data processing system.' McGee, supra note 54, at 654.
Additionally, the Internal Revenue Service defines software as 'all programs or
routines used to cause a computer to perform a desired task or set of tasks,
and the documentation required to describe and maintain those programs.' Rev.
Proc. 69-21, 1969-2 C.B. 303. See also 17 U.S.C. section 101 (1982) (copyright
law states '[a 'computer program' is a set of statements or instructions to be
used directly or indirectly in a computer in order to bring about a certain
result'). See generally note 54 supra (notes confusion over the definition of
57. Software is a general term for sets of instructions that direct the
computer to perform various steps to carry out a particular task. Software,
also called a 'computer program' or simply a 'program', can exist in a variety
of forms or states and can be stored or embodied in a variety of devices. See
Comptroller v. Equitable Trust Co., 296 Md. 459, 464 A.2d 248, 250 (1983).
See also Note, Semiconductor Chip Protection: Changing Roles for Copyright and
Competition, 71 VA. L. REV. 249, 251 & n.13 (1985) (software permanently
stored in an electronic circuit, such as an ROM, is referred to as firmware).
Software starts out as an intangible idea or objective for performing a
specific function on a computer. Since computers do not comprehend ideas,
before such an idea can be employed by a computer it must be reduced to a form
that is understandable to the computer. Therefore, after developing a clear
understanding of the program's objective, the software designer or programmer
creates a representation, such as a flowchart, that illustrates the basic logic
of the program. Such a flowchart comprises standard symbols and words which lay
out the basic logic. See Grogan, Decompilation and Disassembly: Undoing
Software Protection, COMPUTER L. ANN. 5, 6 (1985). In addition to a flowchart,
a program may also be represented at this stage in mnemonic form which is a
list of abbreviated English language sentences that are simpler, easier to
write, and consume less space than a flowchart. D. CANNON & G. LUECKE,
UNDERSTANDING MICROPROCESSORS 6-2 (1979). Such mnemonic form is
typically used today in lieu of flowcharts. See MacGrady, Protection of Computer
Software-An Update & Practical Synthesis, 20 HOUS. L. REV. 1033, 1035 (1983).
The diagrammatic representation of software in a flowchart or other form is
understandable to any programmer but it cannot be used by a computer.
Therefore, the programmer must convert his representation of the software into
any one of several standard high level computer languages, called source code,
which consist of English words, abbreviations, numbers, and mathematical
symbols. The software can now be fed into a computer via a variety of methods,
such as by typing the various steps of the program, in source code, into the
computer via a keyboard. The computer is still unable to directly understand
the software in its source code form but other internal programs, referred to
as compilers, assemblers or interpreters, translate the steps expressed in
source code to a form directly understandable by the computer. See D. CANNON &
G. LUECKE, supra at 6-12. This form, known as machine language or object
code, would consist of clusters of 'Os' and 'ls' if written out symbolically.
Once software is created and converted to either source or object code it is
usually placed in one of several memory devices or storage mediums so it can be
used repeatedly. See Bender, supra note 11, at 409 (program in source or object
code form can be stored on various media such as punched cards or magnetic
tape); Comment, 10 N.C.J. INT'L L. & COM. REG. 667, supra note 35, at 669
(program can be stored on punched cards, magnetic tape or floppy disks).
Programs which are used internally by a computer for basic operations which
allow the computer to operate are generally classified as operating software or
operating systems. See Note, Copyright Law & Computer Software: The Third &
Ninth Circuits Take Another Bite of the Apple, 49 ALB. L. REV. 170, 174 & n.11
(1984) (operating systems coordinate internal activities of computer hardware);
Note, Defining the Scope of Copyright Protection for Computer Software, 38
STAN. L. REV. 497, 502 (1986) (operating or systems software makes computer
function and runs other software). See also D.BENDER, supra note 1, sections 2.06[2 at
2-114 to 2-117 (1984) (detailed discussion of operating system software).
Often, some of this operating software is permanently contained in internal
memory devices known as ROMs. Software which provides specific applications for
the user such as programs for word processing or financial management are
generally classified as application software and usually stored on a disk or
magnetic tape. See Note, 49 ALB. L. REV. 170, supra, at 174 ('application
programs, such as video game cartridges or word processing programs, interact
directly with the computer user.'); Note, 38 STAN. L. REV. 497, supra at
502 (application programs interact directly with user to serve user's needs);
M. MASON, AN INTRODUCTION TO USING COMPUTERS IN THE LAW 20-21
(1984) (application programs are what make a computer useful by allowing it to
perform diverse tasks for user). Application software is usually obtained
either by hiring a programmer to create a custom program for the user's special
needs or by purchasing a standard canned program which can be used as is in the
computer. Holmes, supra note 8, at 6. Operating software is usually of little interest to the
computer user since it is a function of the computer's design and invisible to the user. The
user is generally interested in application software, however, since these are the programs
the user deals with directly and actually operates. A multitude of
this type of software is commercially available on diskettes or magnetic tapes
and this is one of the major reasons computers have become so numerous and
useful. The quantity of application software available is often what determines
whether a computer will be commercially successful. See, e.g., Can Amiga Rock &
Roll?, Newsweek, Oct. 14, 1985, at 66 (noting lack of adequate application
software may be one factor preventing commercial success of a new computer).
Software is supplied to users in a variety of forms and via a variety of
commercial transactions. Software may be supplied as an integral part of
computer hardware. For example, sale of certain hardware, such as a central
processing unit or a CPU, usually includes some operating software permanently
stored in a ROM which is incorporated in the CPU. This software, called
firmware, is viewed as part of the hardware when a computer is obtained. See
Holmes, supra note 8, at 5 (system programs frequently supplied with and built
into computer hardware); Bender, supra note 11, at 410 (system programs, also
called operating software, are often supplied with computer hardware by
Application software which enables the computer to perform specific functions
for the user is supplied separately from the computer hardware and it is often
capable of being used on different computers provided the computers use the
same operating software. See M. MASON, supra, at 20; Note, 49 ALB. L. REV.
170, supra, at 174. This software must be supplied to users in a readily usable
form so it is provided embodied in a physical medium such as magnetic tape or a
diskette. This allows the software producer to deliver software in a
standardized form which can be used on a variety of computers. The user merely
inserts the diskette into a disk drive and operating software then transfers
the application software from the diskette to the CPU so the computer can
perform the appropriate applications.
Some computer system users may require specialized application software
customized to their particular requirements. Such a user may obtain
conventional application software on a diskette or tape and modify it to meet
those special requirements. Alternatively, the user may employ a programmer who
creates custom software to meet the user's needs. The programmer will go
through the various steps already discussed for the development of software and
the resulting program will be stored on some physical medium such as a disk or
For a general discussion of the development process of software see Grogan,
supra, at 6-8; Bender, supra note 11, at 408-09; Comment, 10 N.C.J. INT'L
L. & COM. REG. 667, supra note 35, at 668-71.
58. See supra note 55. See also D. BENDER, supra note 1, section 2.06(3)(b) at 2-
119 (detailed discussion of flowcharts).
59. See supra note 57.
61. See T. HARRIS, supra note 33, at 33-36; Bender, supra note 11, at 408-09.
62. See infra note 66 for a discussion of various mediums in which software is
63. Compare Note, 84 COLUM. L. REV. 1992, supra note 56, at 1992 n.1
(documentation accompanying a computer program not within definition of
software) with D. BENDER, supra note 1, section 2-112.4 (definition of software
includes all documents that explain or describe software operation).
64. See Note, 4 COMPUTER L.J. 373, supra note 56, at 393.
65. See T. HARRIS, supra note 33, at 37 (problems result when the law, which
is slow to evolve, is applied to the fast moving field of computers).
66. By way of background, a broad overview of a computer reveals a machine
that lacks the ability to think and which has limited capabilities. A computer
can only perform repetitious steps and calculations. See T. HARRIS, supra note
33, at 19-20. However, because it can perform such steps and calculations at
lightning speeds without error and without tiring it can be adapted to a myriad
of uses. See M. MASON, supra note 57, at 8 (computer performance measured in
millionths of a second). Almost all tasks can be reduced to a series of steps,
which a computer can then be used to execute. For example, computer-aided legal
research via the LEXIS or WESTLAW systems allows the user to instruct the
computer to find every case in a particular jurisdiction which mentions a
certain word or series of words. A person could manually perform this task by
actually reading every case over a period of months or even years. The computer
performs this same procedure except that it can provide you with either the
citations or the full text of the cases that contain those words in a matter of
seconds or minutes. See generally D. CANNON & G. LUECKE, supra note 57, at 1-20
to 1-21 (number problems that would potentially take weeks or even months to
compute by hand can be solved by a computer in minutes).
A computer consists of various types of components which are referred to by
different names. The electronic guts of a computer which may be contained in a
cabinet or box are referred to as the 'central processing unit' or 'CPU.' The
CPU, which is really the computer's brain, controls the operation of the
computer and enables it to perform the various tasks it is asked to do. See T.
HARRIS, supra note 33, at 20.
The computer operator communicates with the computer via 'input devices' which
take various forms. One form seen at the check-out counters of many retail
stores is the 'optical character reader' or 'OCR.' In supermarkets this device
is typically built into the check-out counter. When packaged food items are
passed over it the OCR reads a code on the label which is then transmitted to
the computer. Among other things, this device can keep track of inventory and
instantly compute your bill. In other stores the OCR is a hand-held gun-shaped
device which is passed over the product label by the store cashier. The most
common input device, however, is the 'keyboard,' which resembles an ordinary
typewriter keyboard. The computer operator types information into the computer
just as someone would type on a typewriter.
To obtain the output of a computer, which are the results of the task carried
out by the computer, 'output devices' are required. Typical output devices are
'monitors' which are video screens that resemble a television screen. These
monitors may also be referred to as a 'cathode ray tube,' 'CRT,' 'video display
terminal,' or 'VDT.' Another common output device is a 'printer' which provides
printed computer output. Printers come in a variety of types with the
differences generally being the quality and speed of printing. See M. MASON,
supra note 57, at 17-18 (discussion of different types of printers and the
different printing speeds and output quality provided by different printers).
Another essential element of the computer system is 'memory' which is the
portion of the system where information is stored. D. CANNON & G. LUECKE, supra
note 57, at G-3. The computer must be able to store information it is using to
perform a particular task in addition to storing data for future recall. Common
electronic memory devices are 'random access memories' or 'RAMs,' 'read only
memories' or 'ROMs,' 'programmable read only memories' or 'PROMs,' and
'erasable programmable read only memories' or 'EPROMs.' These devices are
internal memory devices which are usually located within and permanently
connected to the computer.
Additionally, there are several other storage mediums which are used in
conjunction with memory devices. These mediums, called 'auxiliary mass
storage' or 'auxiliary memory,' can be used to store information received from
memory and to provide information to memory for use by the computer. The most
common of these storage mediums are 'disks' which are either removable or
permanently connected to the computer. M. MASON, supra note 57 at 10-12.
Removable disks, called 'floppy disks,' 'diskettes' or 'floppies,' consist of a
circular plastic disk, similar in size and appearance to a 45 RPM record, which
is enclosed in a square rigid envelope. See generally L. POOLE, M. McNIFF & S.
COOK, APPLE II USER'S GUIDE 157-60 (1981) (discussion of disks). Floppies are
utilized by inserting them into a 'disk drive' which is the mechanism that
enables them to receive data from the computer memory or to provide stored data
to the computer memory. Permanently connected disks are called 'hard disks' or
'winchester disks.' 'Magnetic tape' is also used as a storage medium. It is
very similar to the tape used on a reel-to-reel tape recorder, but because it
is the slowest medium for retrieving data, its uses are limited. See M. MASON,
supra note 57 at 13. The basic difference between the various memory devices
and storage mediums is the amount of information that can be stored and the
speed with which the computer can obtain information or store information in
the memory device or storage medium. For example, a computer can retrieve
information from a 'RAM' used as the computer's main memory anywhere from
25,000 to 75,000 times faster than it can obtain data from an auxiliary
storage medium such as a diskette. Id. at 10.
The various computer components already discussed are generically referred to
as 'hardware.' Depending on the size and type of computer all of the various
hardware elements may be combined in a single enclosure or they may exist as
separate elements connected together by wire cables. If a computer consists of
separate elements connected to the CPU by cables, then all hardware elements
connected to the CPU are called 'peripherals.'
67. Bender, supra note 11, at 438.
68. See Note, 59 WASH. L. REV. 511, supra note 9, at 512 n.9; Raysman,
supra note 9, at 268.
69. See Raysman, supra note 9, at 268; Semple, supra note 7, at 450 n.2.
70. Bender, supra note 11, at 410. See Samuelson, CONTU Revisited: The Case
Against Copyright Protection for Computer Programs in Machine Readable Form,
1984 DUKE L.J. 663, 678-79 & n.55.
71. A decade ago, hardware manufacturers supplied almost all computer
programs. Today, independent software houses account for one-third of the
software market and that share is expected to increase to one-half by 1988. See
Bender, supra note 11, at 410 n.7.
72. In response to this growing market, programs today typically cost between
$50 and $800 and they are increasingly being marketed over-the-counter as a
mass-marketed commodity. Bender, supra note 11, at 438-39. See also Note, 14
CONN. L. REV. 71, supra note 3, at 107 & n.186 (computer hardware vendors
usually provide canned software today in lieu of custom programming a computer
for a customer).
73. The recognition of software as a distinct entity separate from computer
hardware is inevitable in view of the decreasing cost of hardware. Today
hardware costs amount to no more than thirty to forty percent of the total cost
of a computer system. Note, 14 CONN. L. REV. 71, supra note 3, at 108 &
74. See supra note 57 with regard to how software is created. See also D.
BENDER, supra note 1, sections 2.06(1) to 2.06(4) at 2-112.4 to 2-145 (background
discussion of how software is created); Grogan, supra note 57, at 6-8
(discussion of the software development process).
75. See supra note 34.
76. See supra note 35.
77. Courts have found numerous things that embody intellectual property rights
to be goods under article 2. For example, books, which contain intellectual
property protected by copyright law, were found to be goods under article 2.
Cardozo v. True, 342 So. 2d 1053, 1055 (Fla. Dist. Ct. App. 1977).
Magazines, which also include intellectual property protected by copyright,
have been found to be goods. Gross Valentino Printing Co. v. Clarke, 120
Ill. App. 3d 907, 458 N.E.2d 1027 (1983). Likewise, video games which utilize
internal computer programs that may embody intellectual property in the form of
either trade secrets or copyrighted software were held to be goods. Capital
Assoc., Inc. v. Hudgens, 455 So. 2d 651 (Fla. Dist. Ct. App. 1984).
78. See supra note 57. See also D. BENDER, supra note 1, sections 2.06(3)(c) to
2.06(3)(d) at 2-125 to 2-143 (discussion of various computer languages).
79. See supra note 66 (discussion of mediums than can embody information such
80. See generally U.C.C. section 9-109 (1972) (for purposes of secured transactions
the same good can be classified as 'consumer goods,' 'equipment,' 'farm
products' or 'inventory' with its treatment depending on the classification).
81. Under article 2 lumber and other building supplies stacked on the shelf of
a retail store are movable things and therefore goods when a customer buys them
to build a house. See U.C.C. section 2-105. However, if the house is sold after it
has been built, it is treated as realty covered by the law of real property and
not by article 2 of the U.C.C.
82. See Cardozo v. True, 342 So. 2d 1053, 1055 (Fla. Dist. Ct. App. 1977)
(books are goods). Cf. Citizens & Southern Sys., Inc. v. South Carolina Tax
Comm'n, 280 S.Ct. 138, 311 S.E.2d 717 (1984). In South Carolina Tax
Comm'n the court stated that under the state sales tax law, which only applied
to tangible personal property: '[If a professor were to convey knowledge or
information to students in person, a sales tax would not be assessed upon the
fees charged; however, if the professor published that knowledge or information
in a book or recorded it on a phonograph disc, a sales tax would be assessed
upon the sale of the book or record.' Id. at 718.
83. See supra note 48 and accompanying text.
84. See generally, supra note 77 and accompanying text.
85. 457 F. Supp. 765 (E.D.N.Y. 1978), modified, 604 F.2d 737 (2d Cir.
1979) (reversed in part because district court did not properly apply the
statute of limitations).
86. 457 F. Supp. at 769.
87. For example, an electronic device such as a microprocessor which contains
a computer program comprises both intangible intellectual property and tangible
property. The law recognizes the existence of both of these types of property
and provides independent protection for each type of property. Under copyright
law the intangible form of expression is considered a literary work protected
by copyright law. 17 U.S.C. section 101 (1982). Copyright protects the form of
expression of the program against reproduction, among other things, without
permission of the copyright owner. 17 U.S.C. section 106(1) (1982). The tangible
electronic device, however, which is not protectable by copyright, is subject
to protection under a different statute. Semi-Conductor Chip Protection Act,
Pub. L. 98-260, Title III, 98 Stat. 3348 (1984) (codified at 17 U.S.C. sections
901-904) (grants creator of new microprocessor the right to control use and
production of the microprocessor for a limited time).
Additionally, the legislative history of the Copyright Act of 1976 states that
it is a fundamental principle under the Act 'that copyright ownership and
ownership of a material object in which the work is embodied are entirely
separate things.' H.R. Rep. No. 1476, 94th Cong., 2d Sess. 124, reprinted in
1976 U.S. CODE CONG. & ADMIN. NEWS 5659, 5739. See also 17 U.S.C. s 202
(1982) (stating 'ownership of a copyright . . . is distinct from ownership of
any material object in which the [copyrighted work is embodied'); Comptroller
of the Treasury v. Equitable Trust Co., 296 Md. 459, 464 A.2d 248, 252, n.5
(1983) (noting that sale of copyrighted software embodied in a tangible medium,
such as a tape, is not a transfer of any intangible rights arising under the
88. 714 F.2d 1240 (3d Cir. 1983), cert. dismissed 464 U.S. 1033 (1984).
89. 714 F.2d at 1249.
91. Note, 59 WASH. L. REV. 511, supra note 8, at 511 (software is an
intangible collection of ideas). Additionally, in the tax area some jurisdictions have held
that computer programs are intangible personal property. Commerce Union Bank v.
Tidwell, 538 S.W.2d 405 (Tenn. 1976), involved the determination that the sale of
computer software did not involve the sale of tangible personal property
subject to state tax levied on such sales. Tidwell focused on the low value
of the medium containing the software as compared to the value of the medium
once it contained software. See James v. Tres Computer Sys., Inc., 642
S.W.2d 347, 348 (Mo. 1982) (blank magnetic tapes worth $50 became worth
$135,000 once encoded with software). Also, the software contained on a tape or
diskette could be input into a computer and then the medium which held the
software could be discarded. Id. at 349. Alternatively, in First National
Bank of Fort Worth v. Bullock, 584 S.W.2d 548 (Tex. Civ. App. 1979), a case
involving the same issue as Tidwell, the court said that the computer could
be programmed by hand by a programmer sitting at a keyboard or by transmitting
the software over a telephone line in the form of digital data and therefore
the medium containing the software was unnecessary for completing the software
sale. Id. at 550. Tidwell and Bullock thus concluded that the intangible
information comprising the software, rather than the tangible medium embodying
the software, was the thing being sold. See also District of Columbia v.
Universal Computer Associates, Inc., 465 F.2d 615, 618 (D.C. Cir. 1972)
(software embodied in tangible medium is intangible intellectual property). But
see Citizens & Southern Systems, Inc. v. South Carolina Tax Comm'n, 280 S.C.
138, 311 S.E.2d 717 (1984) (software contained on magnetic tape taxable at its
full value as software); Comptroller v. Equitable Trust Co., 296 Md. 459,
464 A.2d 248 (1983) (canned software taxable); Chittenden Trust Co. v. King,
465 A.2d 1100 (Vt. 1983) (software purchased on magnetic tapes taxable at
its full value even though the tapes were worth only about $15 blank). However,
the reasoning of Tidwell and Bullock is seriously flawed especially in
view of the determination by those courts that motion pictures and phonograph
records are subject to taxation as tangible personal property. See Comptroller
v. Equitable Trust Co., 296 Md. 459, 464 A.2d 248, 258, 261 (1983) (the
court rejected, for state tax purposes, distinctions between canned software
and phonograph records and movie films); James v. Tres Computer Serv., Inc.,
642 S.W.2d 347, 351-53 (Mo. 1982) (Rendlen, J., dissenting) (treating
software differently than phonograph records and motion pictures does not make
sense). A copy of a motion picture is woth significantly more than blank film.
Also, a blank record or tape is worth significantly more if it contains a
recording of a live concert, for example. A motion picture or music on a record
could easily be transferred to a video cassette recorder or a tape recorder
respectively, and the film or record can then be discarded. Id. at 351-52.
Finally, a motion picture or music could be recreated from scratch from an
original script or musical score respectively.
Application of the logic employed in Tidwell and Bullock would change the
treatment of some tangible goods which have traditionally been subject to sales
tax at their full sale price. For example, a book can be discarded once it is
read and the information it contains is fully understood. 642 S.W.2d at 351.
The information in the book could also be conveyed by other mediums such as by
having someone read the information onto a tape and therefore the book is not a
necessary medium of conveying the information in the book. See id. at 352.
Finally, the information contained in a book is an intangible which is
separable from the book itself which is merely a tangible medium of conveying
the intangible information. Id. Therefore, the value of a book for sales tax
purposes, based on the reasoning of Tidwell and Bullock, would be the
value of the paper, glue, ink, and binding without regard to the writing
contained in the book. See James v. Tres Computer Serv., Inc., 642 S.W.2d
347 (Mo. 1982) (taxable value of software on magnetic tapes was the value of
the tapes if they were blank). This approach could apply equally to many other
types of property although it has been limited to software.
Although the reasoning utilized by Tidwell and Bullock applied to
determining if software was tangible property under state tax law, it is
analogous to the question of whether software is a good under article 2. This
reasoning probably underlies the conclusion by some commentators that software
is an intangible collection of ideas. Additionally, it probably provides some
of the confusion which has caused courts to avoid definitive determination of
whether software is a good under article 2.
92. Cardozo v. True, 342 So. 2d 1053, 1055 (Fla. Dist. Ct. App. 1977).
93. 17 U.S.C. section 106(1) (1982).
94. Id. at section 106.
95. Id. at section 109(a).
96. See supra note 92. See also H.R. Rep., supra note 87.
97. In re R & R Contracting, Inc., 4 Bankr. 626, 628 (Bankr. E.D. Wash.
1980); Peckham v. Larsen Chevrolet-Buick-Oldsmobile, 99 Idaho 675, 587 P.2d
816, 819 (1978); Gillespie v. American Motors Corp., 51 N.C. App. 535, 277
S.E.2d 100, 102 (1981).
98. 35 U.S.C. section 154 (1982).
99. In James v. Tres Computer Services, Inc., 642 S.W.2d 347 (Mo. 1982),
the purchaser of software paid $135,000 for software on magnetic tapes but
claimed only a $50 value of the transaction (the value of the blank tapes) for
purposes of state use taxes which applied to tangible personal property. Id.
at 347-48. The court found that the software was intangible property separable
from the tapes embodying it which were tangible personal property. Based on
this distinction, tax was only due on the value of the blank tapes. Id. at
100. See id. at 351-53 (Rendlen, J., dissenting), where Judge Rendlen noted
that phonograph records, tapes, books, and films are all valued, for purposes
of state use tax, based on the intangible information they contain. Therefore,
it is illogical to separate the intangible aspects of software from the
tangible medium embodying it for purposes of the use tax due.
101. See Citizens & Southern Sys., Inc. v. South Carolina Tax Comm'n, 280
S.C. 138, 141, 311 S.E.2d 717, 718 (1984) ('generally, the value of books and
records is the matter which is contained in them, an intangible; the value is
not in the paper, binding, or printer's ink.').
102. See supra note 57. See also supra note 66 for a discussion of the various
memory devices for containing software.
103. See supra note 82 and accompanying text.
104. See supra note 48 and accompanying text.
105. See supra notes 100-01 and accompanying text.
106. See supra note 100.
107. 187 Tenn. 112, 213 S.W.2d 27 (1948).
108. Id. at 29.
109. Over four million United States patents have been issued to date. These
cover everything from new forms of life (Diamond v. Chakrabarty, 447 U.S.
303 (1980)) and a computerized method of curing rubber (Diamond v. Diehr,
450 U.S. 175 (1981)), to a pump top sprayer for a bottle (U.S. Patent
2,870,943 issued on January 27, 1959, reprinted in R. CHOATE AND W. FRANCIS,
CASES AND MATERIALS ON PATENT LAW 89-92 (2d ed. 1981)).
Under the patent law 'any new and useful process, machine, manufacture, or
composition of matter, or any new and useful improvement thereof' may be
patentable. 35 U.S.C. section 101 (1982).
110. Trade secret law is a highly developed body of law that protects almost
any information or knowledge that is kept secret and used to conduct a
business. See Smith v. Dravo Corp., 203 F.2d 369, 373 (7th Cir. 1953).
Trade secret law is primarily state common law. See 12A R. MILGRIM, BUSINESS
ORGANIZATIONS, Milgrim on Trade Secrets, 9.03(1) at 9-65 (1986). However, some
states have adopted statutes to deal with trade secrets. See e.g., Uniform
Trade Secrets Act sections 1-11, 14 U.L.A. 541 (1980) (adopted by California,
Connecticut, Delaware, Indiana, Kansas, Louisiana, Minnesota, Montana, North
Dakota, and Washington). For a discussion of the application of trade secret law to
computer software, see Bender, supra note 6.
111. Despite the fact that Coca-Cola results from a secret process (see infra
note 112 and accompanying text), it is a food which has been held to be a good
under article 2 of the U.C.C. See Guaranteed Foods of Neb., Inc. v. Rison,
207 Neb. 400, 406, 299 N.W.2d 507, 511 (1980). See also Spiering v. Fairmont
Foods Co., 424 F.2d 337, 339 (7th Cir. 1970) (milk is a good under article
112. See W. KONOID, B. TITTEL, D. FREI, & D. STALLARD, WHAT EVERY
ENGINEER SHOULD KNOW ABOUT PATENTS 81 (1979); 12A R. MILGRIM, supra
note 110, section 5.04(2) at 5-115 n.12.
113. See supra note 101. Despite this, both books and magazines have been held
to be goods under article 2 of the U.C.C. See Cardozo v. True, 342 So. 2d
1053, 1055 (Fla. Dist. Ct. App. 1977) (books are goods); Gross Valentino
Printing Co. v. Clarks, 120 Ill. App. 3d 907, 458 N.E.2d 1027
(1983) (magazines are goods).
114. Trademarks, which can have enormous value in our consumer-oriented
economy, are protectable under federal law. See The Lanham Act, 15 U.S.C. sections
1051-1127 (1982). Numerous state laws also exist for protecting trademarks.
See, e.g., N.J. Stat. Ann. sections 56:3-13.1 to 56:3-13.14 (West Supp. 1986). See
generally J. McCARTHY, TRADEMARKS AND UNFAIR COMPETITION (2d ed.
1984) (general discussion of trademark law).
115. See supra notes 111, 113 and accompanying text.
116. Some commentators would disagree with this statement. See, e.g., Note,
59 WASH. L. REV. 511, supra note 9 (author concludes judicial treatment of
software transactions has been inconsistent).
117. 772 F.2d 543 (9th Cir. 1985).
118. Id. at 546.
120. This predominant feature test is the most widely used test by courts to
classify a hybrid contract involving both goods and services as either a sales
contract or a service contract. See infra notes 278-79 and accompanying text.
122. No. 83 Civ. 8729 (S.D.N.Y. Aug. 30, 1984) (available on LEXIS, Genfed
Library, Dist. file).
123. Section 2-607(3)(a) requires that once a buyer has accepted the tender of
goods 'the buyer must within a reasonable time after he discovers or should
have discovered any breach notify the seller of breach or be barred from any
remedy.' U.C.C. section 2-607(3)(a) (1978).
124. Section 2-719(2) states: 'Where circumstances cause an exclusive remedy
or limited remedy to fail of its essential purpose, remedy may be had as
provided in this Act [U.C.C..' U.C.C. section 2-719(2) (1978).
125. 580 S.W.2d 76 (Tex. Civ. App. 1979).
126. Id. at 81.
127. Section 2-725 provides a four year statute of limitations which can be
reduced by agreement of the parties but not extended.
128. Section 2-316 provides specific rules that govern when a warranty
disclaimer in a contract is valid.
129. See W. R. Weaver Co., 580 S.W.2d at 80-81.
130. 492 F. Supp. 823 (N.D. Fla. 1980).
131. Section 2-719 generally allows the parties to a transaction to shape
their own remedies by limiting damages or by other means as long as those means
132. See supra note 128.
133. Hi Neigbor Enterprises v. Burroughs Corp., 492 F. Supp. 823, 826-27
(N.D. Fla. 1980).
134. 33 U.C.C. Rep. 954 (D. Mass. 1981).
135. Id. at 962.
138. 579 F. Supp. 135 (D. Md. 1984).
139. Id. at 138.
141. Additional support for the proposition that software is a good under
article 2 can be found in cases in which article 2 is applied to transactions
involving both hardware and software without any distinction being made between
hardware and software. See Jaskey Finance & Leasing v. Display Data Corp.,
564 F. Supp. 160 (E.D. Pa. 1983) (buyer of a computer with software to
operate the computer unsuccessfully sued the seller for breach of warranty when
the computer allegedly failed to operate as warranted; the court applied
article 2 warranty disclaimer without any distinction between the hardware and
software); Applications, Inc. v. Hewlett-Packard Co., 501 F. Supp. 129
(S.D.N.Y. 1980), aff'd 672 F.2d 1076 (2d Cir. 1982) (plaintiff purchased
computer programmed with new computer language that did not perform as
warranted; warranty questions were determined under article 2 without any
discussion of the applicability of article 2 or any discussion of a distinction
between hardware and software for purposes of article 2); Carl Beasley Ford,
Inc. v. Burroughs Corp., 361 F. Supp. 325 (E.D. Pa. 1973), aff'd without
opinion, 493 F.2d 1400 (3d Cir. 1974) (bundled sale of computer with 13
programs resulted in a contract suit for the purchase price when some of the
programs were delivered late and others performed improperly; court applied
article 2 to the transaction without any distinction between hardware and
software); Schatz Distrib. Co. v. Olivetti Corp., 7 Kan.2d 676, 647 P.2d
820 (1982) (court applied article 2 warranty provisions in awarding damages for
a computer system that failed to operate, without distinguishing between the
hardware and software, and without determining if the computer failed to work
because of hardware or software defects). See also U.S. Welding v. Burroughs
Corp., 587 F. Supp. 49 (D. Colo. 1984) (in an action denying a motion to
dismiss claim of negligent misrepresentation for the lease of a computer and
operating software, the court inferred that action was also available under
article 2 warranty provisions); Kalil Bottling Co. v. Burroughs Corp., 127
Az. 278, 619 P.2d 1055 (Ariz. Ct. App. 1980) (court applied A.R.S. 44-2398,
which is the Arizona codification of U.C.C. s 2-719, in a breach of warranty
suit for a lease of computer hardware and software without explanation or
distinction between hardware and software).
142. See Hartford Mutual Ins. Co. v. Seibels, Bruce & Co., 579 F. Supp.
135, 138 (D. Md. 1984) (court noted that application of article 2 to licensed
software depended upon two issues: (1) was a license a contract for sale; (2)
was software a good or service).
143. See, e.g., Hertz Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753,
757 (Ky. Ct. App. 1982) (U.C.C. applicable to lease transactions); Mieske v.
Bartell Drug Co., 92 Wash.2d 40, 593 P.2d 1308 (1979) (article 2 applicable
to bailment). But see, e.g., W. R. Weaver Co. v. Burroughs Corp., 580 S.W.2d
76, 81 (Tex. Civ. App. 1979) (article 2 does not apply to lease); Bona v.
Graefe, 264 Md. 60, 61-62, 285 A.2d 607, 609 (1972) (article 2 does not
apply to bailment). See also infra text accompanying notes 177-95 with regard
to extension of article 2 to lease and bailment transactions and text
accompanying notes 266-90 with regard to article 2 treatment of hybrid
144. Regardless of the form in which software is provided, it is usually not
sold to users. Instead, most users are merely given a right to use the software
under a license. R. BERNACCHI & G. LARSEN, supra note 9, at 368-69 (software
usually licensed not sold); J. AUER & C. HARRIS COMPUTER CONTRACT
NEGOTIATIONS 290-91 (1981) (computer programs usually licensed instead of being
sold). But see D. BENDER, supra note 1, section 3.02[4 at 3-9 to 3-10 (noting that
although most software is licensed, one exception is custom software which is usually
sold). Specialized software which is both costly and intended for a limited
market is typically maintained as a trade secret. See, e.g., Management Science
Am., Inc. v. Cyborg Sys., Inc., 6 Computer L. Serv. Rep. (Callaghan) 921, 922-
23 (N.D. Ill. 1978) (specialized software confidentially licensed to
customers). To protect this trade secret status, the software creator often
enters into explicit license agreements with a limited number of users who
promise to maintain the software as proprietary information and to pay either a
one-time license fee or periodic fees during the license term. Such agreements
may be carefully negotiated or merely form agreements provided by the software
licensor. However, in either case they are individually executed by both
parties to the transaction so that the licensee or software user is aware that
only a right to confidential use of software has been obtained. Additionally,
the license may limit the number of copies of software that can be made,
specify the computer that can run the software, list the particular persons who
will have access to the software, and require return of the software and all
related materials at the termination of the license. See Conley & Bryan,
Software Escrow in Bankruptcy: An International Perspective, 10 N.C.J. INT'L
L. & COM. REG. 579, 581 n.10 (1985) (license usually restricts time, place and
manner of use of software).
Mass-marketed or canned software which is widely distributed to the public via
retail and mail order outlets is also usually licensed. However, it is
impractical from a marketing perspective to require purchasers of mass-marketed
software to individually negotiate or sign license agreements or to pay
periodic license fees. See Scott, Market Analysis & Software Licensing
Restrictions, 1 COMPUTER L. & PRAC. 48, 49 (1984) (no opportunity for
negotiating or tailoring terms in sale of low-priced, mass-marketed software);
Note, 38 STAN. L. REV. 497, supra note 57, at 505 (impractical to negotiate
individual licenses with all prospective users of mass-marketed software). To
overcome these impediments, software producers insert a license agreement,
usually called a shrink-wrap or tear-me-open license, in the software
packaging. See Bender, supra note 11, at 438-40 (discussion of shrink-wrap
licenses); see also Sherman, Shrink-wrap Licensing of Computer Programs,
1985 COMPUTER LAW L. INST. at 563-80 (copies of licenses used by different
companies); Note, 59 WASH. L. REV. 511, supra note 9, at 518 n.40 (copy of
Radio Shack license). Typically this license states that opening the package or
using the software indicates acceptance of the licensing agreement. A license
of this type makes it clear that the software producer retains title and
ownership of the software, with the purchaser only being granted a right to use
the software on a single computer. The license is generally a perpetual paid-up
license since in return for a single payment the licensee has a perpetual right
to use the software provided the licensee adheres to the license terms.
Transfer of the software to someone else or use of the software by the
purchaser on more than one computer without payment of an additional license
fee violates the license agreement. The software purchaser is also not
permitted to make copies of the software except for backup copies for the
purchaser's personal use. Additionally, the underlying algorithms or processes
employed by the software may be declared trade secrets which the purchaser of
the software is required to protect. Finally, violation of any terms of the
license by the software licensee allows the software producer to terminate the
license and the licensee must then return the software and any copies to the
Another type of licensing transaction that is being used more frequently for
business users of mass-marketed software is site licenses. A site license is
similar to a shrink-wrap license because it only grants the user a limited
right to use the licensed software in return for a one-time license fee.
However, unlike a shrink-wrap license, the site license allows the licensee to
make unlimited copies of the software provided the copies are used only at a
particular location specified in the license. See Vale & Harding, Practical and
Legal Issues Relating to The Marketing of Microprocessor Software by Means of
Site Licenses, COMPUTER LAW. 1 (Aug. 1985) (discussion of site licenses).
145. Commentators disagree on whether the U.C.C. is a code or a statute. See,
e.g., Hawkland, Uniform Commercial 'Code' Methodology, 1962 U. ILL. L.F.
291 (arguing U.C.C. is a true code). But see, e.g., Murray, The Article 2
Prism: The Underlying Philosophy of Article 2 of the Uniform Commercial Code,
21 WASHBURN L.J. 1, 1 (1981) (article 2 is a group of statutes, not a true
code). See generally Leary & Frisch, Uniform Commercial Code Annual Survey:
General Provisions, Sales, Bulk Transfer, and Documents of Title, 39 BUS. LAW.
1851, 1856 (1984) (concluding that courts treat particular sections of article
2 as statutes).
146. See, e.g., Hertz Commercial Leasing Corp. v. Transp. Credit Clearing
House, 59 Misc. 2d 226, 298 N.Y.S.2d 392 (Civ. Ct. 1969), rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970) (court appears
to view U.C.C. as code and therefore extended coverage of article 2 to
equipment lease). But see Bona v. Graefe, 264 Md. 60, 61-62, 285 A.2d
607, 609 (1972) (court appears to view U.C.C. as a statute since it said
express wording of article 2 limits its application to sales and therefore
domain of article 2 does not extend beyond sales). See also infra note 148 and
accompanying text. See generally R. SPEIDEL, R. SUMMERS & J. WHITE,
COMMERCIAL AND CONSUMER LAW 5-16 (3d ed. 1981) (comparative discussion
of code law versus common law).
147. Hawkland, supra note 145, at 291-92.
148. Gilmore, Legal Realism: Its Cause and Cure, 70 YALE L.J. 1037, 1043
(1961); See also Hawkland, supra note 145, at 292, where another authority
A 'code' is a pre-emptive, systematic, and comprehensive enactment of a whole
field of law. It is pre-emptive in that it displaces all other law in its
subject area save only that which the code excepts. It is systematic in that
all of its parts, arranged in an orderly fashion and stated with a consistent
terminology, form an interlocking, integrated body, revealing its own plan and
containing its own methodology. It is comprehensive in that it is sufficiently
inclusive and independent to enable it to be administered in accordance with
its own basic policies.
149. See Hawkland, supra note 145, at 293-99. See also Paul, The Code and the
Illinois Statutes--A Problem of Accommodation, 1962 U. ILL. L.F. 333, 334
(intent of U.C.C. was to be supreme law in areas it covers). But see R.
SPEIDEL, R. SUMMERS & J. WHITE, supra note 146, at 22-24 (noting areas of
commercial law not covered by U.C.C.).
150. Article 1 of the U.C.C., which is generally applicable to the entire
U.C.C., states that the U.C.C. is designed, 'to simplify, clarify and modernize
the law controlling commercial transactions.' Additionally, it states that the
U.C.C. seeks to bring about uniformity in the law and to allow commercial
practices to develop under the auspices of the U.C.C. U.C.C. section 1-102. See also
Hawkland, supra note 145, at 299-300 (systematic organization of provisions
with consistent terminology that provide means to handle conflicting rules,
fill gaps, and mitigate harshness of rigid rules when appropriate are
attributes of a true code exhibited by the U.C.C.).
It should be noted, however, that even if the U.C.C. is a true code, enactment
of such legislation by state legislatures is somewhat anomalous in view of the
fact that the states, with the exception of Louisiana, are common law
jurisdictions. The common law places high value on case law as precedent, while
a true code relegates case law to a much less exalted position. Consequently, a
built in tension may exist between these competing interests and the underlying
rationales of the common law and code approaches. See Hawkland, supra note 145,
at 318-20 (discussion of interaction of precedent and U.C.C.).
151. Official comment to U.C.C. section 1-104 (supports conclusion that U.C.C. is a
152. U.C.C. sections 1-102(1) and 1-102(2)(b) (1978).
153. Official comment 1 to U.C.C. section 1-102, reprinted in Uniform Commercial
Code, 1 U.L.A. 11-12 (1976).
154. See, e.g., Official comment 2 to U.C.C. section 2-313, reprinted in Uniform
Commercial Code, 1 U.L.A. 312 (1976) (suggesting section, although limited
by its express wording to sales, may be applicable to bailments). Accord
Farnsworth, Implied Warranties of Quality in Non-sale Cases, 57 COLUM. L.
REV. 653, 653 (1957); Miller, A 'Sale of Goods' as a Prerequisite for Warranty
Protection, 24 BUS. LAW 847, 855 (1969); Skelton v. Druid City Hosp. Bd.,
459 So. 2d 818, 820 (Ala. 1984). But see Sawyer v. Pioneer Leasing Corp.,
244 Ark. 943, 957, 428 S.W.2d 46, 55 (1968) (Fogleman, J., dissenting)
(comment 2 does not indicate that section 2-313 is not limited to sales; means
only that article 2 does not prevent court from applying case law warranty
doctrines to non-sale transactions).
155. Providing a method of filling gaps is an attribute of a true code.
Hawkland, supra note 145, at 292.
156. Section 1-103 states: 'Unless displaced by the particular provisions of
this Act [U.C.C., the principles of law and equity, including the law merchant
and the law relative to capacity to contract, principal and agent, estoppel,
fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other
validating or invalidating cause shall supplement its provisions.' U.C.C. section 1-
157 U.C.C. section 1-103 specifically states that the common law is only available
to supplement the U.C.C. and therefore the U.C.C. predominates. U.C.C. section 1-103
(1978). See also Hawkland, supra note 145, at 312-13 (so long as an act
provides the general law, to be supplemented by external rules, it can rise
to the level of a code).
158. See H. JONES, J. KERNOCHAN & A. MURPHY, LEGAL METHOD 746-59
(1980); Gilmore, supra note 148, at 1040.
159. See supra note 148 and accompanying text. Bona v. Graefe, 264 Md. 60, 285 A.2d
607 (1972), exemplifies such narrow statutory construction. In Bona, the court found
sections 2-313 and 2-315 of article 2 to be limited to sale transactions since the express
language of these sections only referred to sales. The court concluded that extension of
these sections to bailment or lease transactions would amount to improper
judicial legislation. Id. at 609.
160. See supra note 148 and accompanying text.
161. See H. JONES, J. KERNOCHAN & A. MURPHY, supra note 158, at 5-7 (under
principle of 'Stare Decisis' prior judicial decisions are generally binding in
subsequent factually similar controversies).
162. R. SPEIDEL, R. SUMMERS & J. WHITE, supra note 146, at 9.
163. U.C.C. section 2-106(1)(1978). Article 2 defines 'buyer' as 'a person who buys
or contracts to buy goods.' U.C.C. section 2-103(1)(a)(1978). 'Seller' is defined as
'a person who sells or contracts to sell goods.' U.C.C. section 2-103(1)(a)(1978).
But see In re Vaillancourt, 7 U.C.C. Rep. 748, 770 (D. Me. 1970) (court
rejects suggestion that use of terms 'buyer,' 'seller,' and 'contract of sale'
in article 2 provision automatically precludes its application to lease of
164. See U.C.C. section 2-202 (1978) (parol evidence rule); section 2-209 (contract
modification); section 2-302 (unconscionability); section 2-303 (allocation of risks);
section 2-309 (absence of time provisions); section 2-317 (warranties); section 2-514
(delivery of documents); section 2-515 (preserving evidence); section 2-611
(retraction of anticipatory repudiation); section 2-720 (cancellation or recission of contract).
165. See U.C.C. section 2-202 (1978) (refers to agreement); section 2-209 (refers to both
contract and agreement); section 2-302 (refers to contract); section 2-303 (refers to
agreement); section 2-309 (refers to both contract and agreement); section 2-611 (refers
to contract); section 2-720 (refers to contract).
166. See U.C.C. section 2-317 (1978) (warranties); section 2-514 (delivery of
documents); section 2-515 (preserving evidence). But see U.C.C. sections 2-106(1) and
2-103(1) (1978) (definition of 'buyer,' 'seller,' 'contract,' and 'agreement'
include the prefatory phrase 'unless the context otherwise requires' and
therefore the language of article 2 may not arguably be limited to sale
transactions); see also U.C.C. section 2-102 (1978) (states article 2 applies, in
general, to 'transactions in goods,' which is broader than sale of goods).
167. Typical software license transactions do not involve a transfer of title
to the software and therefore they are not sales as required by U.C.C. section 2-
106(1). See supra note 144 and accompanying text.
168. See Wells v. 10-X Mfg. Co., 609 F.2d 248, 254 n.3 (6th Cir. 1979)
('the use of the term transaction rather than sale in U.C.C. s 2-102 is
significant in that it makes clear that the reach of article 2 goes beyond
those transactions where there is a transfer of title'); In re Beck, 25
Bankr. 947, 951 (N.D. Ohio 1982) (article 2 applies to transactions in goods
unless the context requires otherwise); Skelton v. Druid City Hosp. Bd., 459
So.2d 818, 821 (Ala. 1984) (article 2 applies to transactions in goods which is
broader than sale of goods); Mieske v. Bartell Drugs Co., 92 Wash. 2d 40,
593 P.2d 1308, 1312 (1979) ('transactions in goods' in section 2-102 is clearly
broader than sale of goods); Hertz Commercial Leasing v. Transp. Credit
Clearing House, 59 Misc. 2d 226, 298 N.Y.S.2d 392, 396-97 (Civ. Ct. 1969),
rev'd on other grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970)
(wording of U.C.C. section 1-102 makes it clear that scope of article 2 is broader
169. See Note, 12 TULSA L.J. 556, supra note 49, at 564-65. See also
Taylor, supra note 22, at 352 (wording of section 2-102 represents imprecise drafting
resulting from drafting mishap). But see Mieske v. Bartell Drug Co., 92
Wash. 2d 40, 593 P.2d 1308, 1312 (1979) (reference to transactions in goods in
section 2-102 sets perimeter of article 2 as being broader than sales; '[had
the drafters of the code intended to limit article 2 to sales they could have
easily so stated.'); Hertz Commercial Leasing Corp. v. Transp. Credit Clearing
House, 298 N.Y.S.2d 392, 396 (Civ. Ct. 1969) ('clearly, a 'transaction'
encompasses a far wider area of activity than a 'sale', and it cannot be
assumed that the word was carelessly chosen.'), rev'd on other grounds, 316
N.Y.S.2d 585 (App. Div. 1970).
170. But see Skelton v. Druid City Hosp. Bd., 459 So. 2d 818, 821 (Ala.
1984) (court applied U.C.C. section 2-315 despite finding no sale and despite express
reference in section 2-315 to 'seller' and 'buyer' based, in part, on broad
scope of section 2-102).
171. See, e.g., U.C.C. section 2-104 (deals with rights of creditors of a seller).
172. 641 S.W.2d 753 (Ky. Ct. App. 1982).
173. Id. at 756.
174. Id. at 756-57.
175. DeKalb A G Research, Inc. v. Abbott, 391 F. Supp. 152, 153-54 (N.D.
Ala. 1974), (lease of hens not covered by article 2 since article 2 applies to
sales not leases), aff'd per curiam 511 F.2d 1162 (5th Cir. 1975); Bona v.
Graefe, 264 Md. 60, 285 A.2d 607 (1972) (article 2 limited to sales so
lease of golf cart not covered); O J & C Co. v. General Hosp. Leasing, 578
S.W.2d 877, 878 (Tex. Civ. App. 1979) (article 2 not applicable to contract to
lease computers since article 2 is expressly limited to sales); W. R. Weaver
Co. v. Burroughs Corp., 580 S.W.2d 76, 81 (Tex. Civ. App. 1979) (article 2
applicable to purchase of software but not to lease of computer since article 2
covers sales but not leases). See also Mays v. Citizens & Southern Nat'l Bank,
132 Ga. App. 602, 208 S.E.2d 614, 619 (1974) (U.C.C. s 2-316 not applicable
to a twenty-four month car lease because wording of section 2-316 explicitly
limits application to sales), rev'd on other grounds, 153 Ga. App. 124,
264 S.E.2d 694 (1980); Thompson Farms, Inc. v. Corno Feed Prod., 366
N.E.2d 3, 14 (Ind. Ct. App. 1977) ('the warranty provisions of Article II of
the Uniform Commercial Code are clearly limited to the sale of goods'). Some
commentators have also supported this view. See, e.g., Murray, supra note 145;
Leary & Frisch, supra note 145.
176. Glenn Dick Equip. Co. v. Galey Constr., Inc., 97 Idaho 216, 541 P.2d
1184, 1188-89 (1975), noted that courts have used three theories to apply
article 2 to a lease; (1) article 2 is directly applicable because a lease is a
transaction in goods which is within the scope of article 2; (2) a lease is
found analogous to a sale; or (3) economic considerations require that certain
article 2 sections be applied to leases. See also In re Community Medical
Center, 623 F.2d 864, 868 n.4 (3d Cir. 1980) (bankruptcy case in which court
noted that although leases are not automatically within article 2 some leasing
arrangements have been found equivalent to sales and therefore within article
2); Vitex Mfg. Corp. v. Caribtex Corp., 377 F.2d 795 (3d Cir. 1967) (in a
breach of contract action, the court noted that even though the U.C.C. did not
control the action it was persuasive authority); Westmont Tractor Co. v. Viking
Exploration, Inc., 543 F. Supp. 1314, 1317 n.3 (D. Mont. 1982) (lease of
business equipment which gave lessee option to purchase equipment at end of
lease was a sale under article 2); In re Vaillancourt, 7 U.C.C. Rep. Serv.
(Callaghan) 748, 770 (D. Me. 1970) (lease containing options to purchase made
lease a contract to sell goods in the future which is within article 2);
Skelton v. Druid City Hosp. Bd., 459 So. 2d 818, 820-21 (Ala. 1984) (article
2 applied despite court determination that sale was not involved in
transaction); M. & W. Farm Serv. Co. v. Callison, 285 N.W.2d 271, 274 n.1
(Iowa 1979) (true lease not within article 2 but lease which is equivalent to
sale or which is really a sale may be within article 2); Mieske v. Bartell Drug
Co., 92 Wash. 2d 40, 593 P.2d 1308 (1979) (article 2 applied to bailment
transaction involving photographic film brought to retail store for
processing); Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46
(1968) (article 2 provision applicable to lease where provision of lease
analogous to sale); Capitol Assoc., Inc. v. Hudgens, 455 So. 2d 651 (Fla.
Dist. Ct. App. 1984) (equipment lease that gave lessee no right to purchase or
acquire title to equipment was within article 2 even though article 2 does not
expressly apply to leases); Owens v. Patent Scaffolding Co., 77 Misc. 2d
992, 354 N.Y.S.2d 778 (Sup. Ct. 1974) (article 2 applicable to lease in this
case even though a true lease, not equivalent or analogous to a sale, was
involved), rev'd on other grounds, 50 A.D.2d 866, 376 N.Y.S.2d 951 (App.
Div. 1975); Hertz Commercial Leasing Corp. v. Transp. Credit Clearing House,
59 Misc. 2d 226, 298 N.Y.S.2d 392 (Civ. Ct. 1969) (article 2 applied to an
equipment lease which in this case was analogous to sale), rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970). Some
commentators have also supported this view. See, e.g., Hawkland, supra note
177. See supra note 46 and accompanying text. See generally Abrams, The
Diminishing Difference Between Selling and Leasing Tangible Personal Property,
24 VILL. L. REV. 706, 708-12 (1979) (discusses the advantages of leasing);
Landis, Tax Aspects of Leasing, 79 COMM. L.J. 8 (1974) (discussion of tax
advantages and consequences of leasing).
178. 264 Md. 69, 285 A.2d 607 (1972).
179. Id. at 609.
180. Id. Accord Mays v. Citizens & Southern Nat'l Bank, 132 Ga. App. 602,
208 S.E.2d 614, 619 (1974), rev'd on other grounds, 153 Ga. App. 124, 264
S.E.2d 494 (1980).
181. 580 S.W.2d 76 (Tex. Civ. App. 1979).
182. Id. at 80-81.
183. 59 Misc. 2d 226, 298 N.Y.S.2d 392 (Civ. App. 1969), rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970).
184. 298 N.Y.S.2d at 395-97.
185. 298 N.Y.S.2d at 395.
187. 92 Wash. 2d 40, 593 P.2d 1308 (1979).
188. Id. at 1312. But see Mason v. General Motors Corp., 397 Mass. 183, 490
N.E.2d 437 (1986) (article 2 not applicable to bailment transaction arising
from car dealer lending customer automobile for test drive).
189. 593 P.2d at 1312.
191. See Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46
(1968); M & W Farm Serv. Co. v. Callison, 285 N.W.2d 271, 274 n.1 (Iowa
1979); Hertz Commercial Leasing Corp. v. Transportation Clearing House, 59
Misc. 2d 226, 298 N.Y.S.2d 392 (Civ. Ct. 1969), rev'd on other grounds, 64
Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970). See also Briscoe's Foodland,
Inc. v. Capitol Assoc., Inc., 42 U.C.C. Rep. Serv. (Callaghan) 1234, 1239
(Miss. 1986) (Robertson, J., concurring) (arguing article 2 should only apply
to equipment leases that are the functional equivalent of sale). See generally
Boss, Panacea or Nightmare? Leases in Article 2, 64 B.U.L. REV. 39
(1984) (examines both advantages and problems resulting from extension of
article 2 to leases); Note, 12 TULSA L.J. 556, supra note 49, at 564-71
(discussion of judicial methods used to apply article 2 to leases); Note,
Warranties in the Leasing of Goods, 31 OHIO ST. L.J. 140 (1970) (author
examines the extension of article 2 warranty provisions to leases and concludes
such provisions should only apply to leasing transactions analogous or
equivalent to sale transactions).
192. See Note, 12 TULSA L.J. 556, supra note 49, at 561 (because the
questions of extending article 2 to leases has arisen in a judicial context,
extension has only been considered with regard to particular sections of
article 2); Note, 31 OHIO ST. L.J. 140, supra note 191, at 140 (many courts
have applied pertinent sections of article 2 to certain types of lease
transactions); Boss, supra note 191, at 48-49 nn.50-62 (catalogs cases applying
particular sections of article 2 to leases). See also Bank of Indiana v.
Holyfield, 476 F. Supp. 104 (S.D. Miss. 1979) (court found the lease
transaction unconscionable and refused to enforce the lease pursuant to section
2-302 of article 2); Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428
S.W.2d 46, 54 (1968) (court held that only section 2-316(2) of article 2 was
applicable to a lease and only when the lease provisions are analogous to a
sale); Glenn Dick Equip. Co. v. Galey Constr., Inc., 97 Idaho 216, 541 P.2d
1184, 1190 (1975) (court concluded that article 2 should be applied to leases
by analogy on a section-by-section basis only); Heller v. Convalescent Home,
49 Ill. App. 3d 213, 365 N.E.2d 1285 (1977) (court rejected the application
of article 2 in its entirety to equipment leases and stated that article 2
would be applied by analogy on a section-by-section basis); Owens v. Patent
Scaffolding Co., 50 A.D.2d 866, 376 N.Y.S.2d 948 (App. Div. 1975) (article
2's section 2-725 was not applicable to the lease even though warranty
provisions of article 2 were applicable to the lease). But see Hertz Commercial
Leasing Corp. v. Joseph, 641 S.W.2d 753, 757 (Ky. Ct. App. 1982) (court held
U.C.C. applicable in its entirety to lease transactions).
193. See Heller v. Convalescent Home, 49 Ill. App. 3d 213, 365 N.E.2d 1285,
1289 (1977) ('we will analogize the provision of article 2 to equipment leases
only when the case involves the same considerations which gave rise to the
Code's provisions and the analogy is not rebutted by the specific circumstances
of the case.')
194. Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46, 54
(1968) (Fogleman, J., dissenting) (criticizing extension of article 2 on a
piecemeal basis because of the resulting uncertainty and lack of guidance for
195. Id. at 961, 428 S.W.2d at 56.
196. See RRX Indus. v. Lab-Con Inc., 772 F.2d 543 (9th Cir. 1985) (software
sold with accompanying services held to be a good subject to article 2); see
also W. R. Weaver Co. v. Burroughs Corp., 580 S.W.2d 76, 80-81 (Tex. Civ.
App. 1979) (sale of custom software subject to warranty disclaimer provision of
197. 604 F.2d 737 (2d Cir. 1979).
198. Id. at 739.
199. Id. at 741.
200. 538 F. Supp. 776 (E.D. Wis. 1982).
201. Id. at 778 n.1.
202. Id. at 778 n.1 and 780.
203. 587 F. Supp. 49 (D. Colo. 1984).
204. It is interesting to note that courts differ on the extension of article
2 to the lease of a computer. For example, in Heller v. Convalescent Home,
49 Ill. App. 3d 213, 365 N.E.2d 1285, 1289 (1977), the court found specific
sections of article 2 applicable by analogy to a computer lease transaction.
Also, in Earman Oil Co. v. Burroughs Corp., 625 F.2d 1291 (5th Cir. 1980),
article 2 was applied without a determination of whether a three party
sale/leaseback arrangement was a true lease or a sale because the court said
commercial transactions should be subject to the same rules without regard to
whether a lease or sale transaction is utilized. Id. at 1297. However, other
courts have rejected the extension of article 2 to computer leases. See, e.g.,
In re Community Medical Center, 623 F.2d 864, 868 n.4 (3d Cir. 1980) (lessee
was not given the opportunity to purchase the computer at the end of lease for
a nominal charge so the transaction was not equivalent to a sale and therefore
the U.C.C. did not apply); W. R. Weaver Co. v. Burroughs Corp., 580 S.W.2d
76 (Tex. Civ. App. 1979) (article 2 was not applicable to a lease of a computer
although it did apply to the purchase of software to run on the leased
computer); O J & C Co. v. General Hosp. Leasing, 578 S.W.2d 877 (Tex. Civ.
App. 1979) (lease of computer was not governed by article 2 since article 2 is
limited to sales).
205. See supra notes 178-82 and accompanying text with regard to judicial
decisions that have limited the scope of article 2 to sales.
206. See supra notes 163-67 and accompanying text.
207. See supra note 183 and accompanying text for a discussion of Hertz
Commercial Leasing Corp. which extended article 2 to equipment leases, and note
187 and accompanying text for a discussion of Mieske which extended article
2 to a bailment. See also 298 N.Y.S.2d at 395. See generally Hertz
Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753, 756-57 (Ky. Ct. App.
1982) (uniformity in commercial law requires bringing lease transactions within
the scope of article 2).
208. See supra note 187 and accompanying text for a discussion of the
209. See U.C.C. sections 1-102 and 1-104. See also supra notes 22, 26, and 149.
210. See, e.g., Hertz, 298 N.Y.S.2d at 395.
211. Id.; see Note, 37 OKLA. L. REV. 317, supra note 46, at 317-19. See
generally Abrams, supra note 177, Landis, supra note 177.
212. See, e.g., Westmont Tractor Co. v. Viking Exploration, Inc., 543 F.
Supp. 1314, 1317 n.3 (D. Mont. 1982) (equipment lease which gave the lessee an
option to purchase the equipment at the end of the lease was a sale under
213. See supra note 144 for a general discussion of software licensing.
214. For example, the cost of creating and marketing electronic chips can be
tens of millions of dollars, while others can copy these chips at a fraction of
those costs. 29 PAT. TRADEMARK & COPYRIGHT J. (BNA) No. 705 at 28 (Nov. 15,
1984). See also Final Report of the National Commission on New Technological
Uses of Copyrighted Works, reprinted in 3 COMPUTER L.J. 53, 58 (1981-82) (cost
of developing computer programs greatly exceeds the cost of their duplication);
Bender, Licensing and Protecting Computer Software via Patents and Trade
Secrets, 1 SOFTWARE PROTECTION & MARKETING 619, 630 (1983) (even if it
costs over a million dollars to create a program, a copy of the program can be
created for less than one hundred dollars).
215. The use of trade secret law, if possible, is often very desirable in
light of the extent of foreign counterfeiting of United States products
protected by patents, copyrights, or trademarks. Such counterfeiting is
estimated to cost the United States twenty billion dollars in lost sales each
year. Time (Business Notes) at 67 (April 21, 1986). See generally Hofer,
Business Warfare Over Trade Secrets, 9 LITIGATION 9 (Summer 1983) (cost of
stolen technology to private business in the United States is estimated at
twenty billion dollars a year).
216. See, e.g., Data General Corp. v. Digital Computer Controls, Inc., 357
A.2d 105, 113 (Del. Ch. 1975) (dissemination of diagrams in confidence does not
destroy secret nature of the diagrams). See also Management Science Am., Inc.
v. Cyborg Sys., Inc., 6 Computer L. Serv. Rep. (Callagahan) 921, 923 (N.D. Ill.
1978) (disclosure of payroll software, subject to a confidential agreement, to
approximately 600 customers did not destroy secret status of the software). See
generally Chicago Bd. of Trade v. Christie Grain & Stock Co., 198 U.S. 236,
250-51 (1904) (secrecy can be maintained despite dissemination of trade secrets
provided such secrets are disclosed in confidence).
217. 35 U.S.C. section 154 (1982) (under patent law, a patent owner can exclude
others from making, using, or selling a patented invention in the United
States); 17 U.S.C. section 106(1) (1982) (under copyright law, a copyright owner
can restrict the reproduction of a copyrighted work).
218. Bender, supra note 214, at 634. See also Freed, Legal Interests
Related to Software Programs, 25 JURIMETRICS J. 347, 362 (1985).
219. Patents typically cost at least several thousand dollars to obtain. See
Smith, Patent and Trade Secret Protection of Software, 1 COMPUTER SOFTWARE &
CHIPS, 551, 555 (1985). In some cases, however, the cost can be as high as one
hundred thousand dollars.
220. See Bender, supra note 214, at 638 (it typically takes three years to
obtain a patent). See generally Conference Reviews: PTO Rule Changes, 26 PAT.
TRADEMARK & COPYRIGHT J. (BNA) No. 649, at 507 (Oct. 6, 1983) (despite the
modernization of the Patent and Trademark Office and resulting increases in
efficiency, Donald J. Quigg, Deputy Commissioner of Patents and Trademarks, has
indicated that the goal of the office is only to achieve, by 1987, an eighteen
month pendency for a patent application); 32 Pat. Trademark & Copyright J.
(BNA) No. 793, at 423 (Aug. 21, 1986) (Commissioner Quigg has modified his
earlier goal so that it is now to achieve an eighteen month pendency as soon as
possible, but not later than 1989).
221. C. Tapper, supra note 13, at 10. See also Bender, supra note 214, at 638
(the three years which is typical to obtain a patent represents a significant
portion of the lifespan of a program); Smith, supra note 219 (because patents
typically take at least three years to obtain, patent protection is most
desirable for inventions with long potential market life).
222. See Bender, supra note 6, at 909.
223. See, e.g., Management Science Am., Inc. v. Cyborg Sys., Inc., 6 Computer
L. Serv. Rep. (Callaghan) 921, 922 (N.D. Ill. 1978) (specialized software was
maintained as trade secret by confidentially licensing it to a limited number
of users). See generally Freed, supra note 218, at 363 (trade secret protection
ideal for software suppliers that deal directly with customers and have
opportunity to enter genuine licenses).
224. See Gilburne and Johnston, Trade Secret Protection for Software
Generally and in the Mass Market, 3 COMPUTER L.J. 211, 227-37
(1982) (discussion of inherent problems with extending trade secret protection
to mass-marketed software).
Nevertheless, canned software is typically provided via a license which often
attempts to protect trade secrets in the software by imposing confidential
obligations on the user. The validity and enforceability of such licenses is
unclear. See Sherman, supra note 23, at 543, 546-51. See also Grogan, supra
note 57, at 10-12 (questioning validity of mass-marketed software licenses).
But see LA. REV. STAT. ANN. sections 54:1961 to 51:1966 (West. Cum. Supp. 1986)
and Software License Enforcement Act, ILL. REV. STAT. ch.29, sections 801-08 (1986)
(both statutes validate and enforce above licenses used to sell mass-marketed
225. Underwater Storage, Inc. v. United States Rubber Co., 371 F.2d 950,
954 (D.C. Cir. 1966) (once trade secret disclosed to whole world it loses its
protected status), cert. denied, 386 U.S. 911 (1967). See also Packard
Instrument Co. v. Reich, 213 U.S.P.Q. 322, 327 (Ill. Ct. App. 1980) (Even
though a process is kept secret, it is not a trade secret if the process is
known and used by the outside world).
226. 'One of the truisms about software is that, while a good program is hard
to write and requires a great deal of effort to do properly, it is generally
very easy to copy.' T. HARRIS, supra note 33, at 190. See generally
Saltzberg, Legal and Technical Protection Through Software Locks, 5 COMPUTER
L.J. 163, 166 (1984) (estimating that forty percent of software in use is
227. See C. Tapper, supra note 13, at 13 (copyright is the most appropriate
form of protection for software). See also Baumgarten, Copyright and Computer
Software, Data Bases and Chip Technology, in 1 COMPUTER SOFTWARE 1984:
PROTECTION AND MARKETING, 11, 17 (mass-marketing of software has focused
attention on copyright as a means of protecting software).
228. See Bender, supra note 11, at 439 (discussion of copyright limitations).
229. 17 U.S.C. section 106(1) (1982).
230. Id. at section 109(a).
231. Id. at section 102(b). See also Apple Computer, Inc. v. Franklin Computer
Corp., 714 F.2d 1240, 1252-53 (3d Cir. 1983) (copyright protects the form or
the means of expression of an idea but not the underlying idea itself);
Comment, Software: A Legislative Solution to the Problem of User's and
Producer's Rights in Computer Software, 44 LA. L. REV. 1413, 1448
(1984) (copyright does not extend to ideas, algorithms, or the logic contained
in the software).
232. Bender, supra note 11, at 439 (copyright will not restrict use of
software to a particular computer or terminal). In response to this limitation,
Illinois has enacted legislation which allows software to be licensed with a
provision limiting the use of the software. See Software License Enforcement
Act, ILL. REV. STAT. ch. 29, section 804(5) (Supp. 1986).
233. See E. KEET, supra note 13, at 119-25, for a discussion of the various
technical means employed to prevent unauthorized duplication of software. The
author concludes that the various methods are of limited utility due to their
high cost and the ability of a determined user to defeat such protective
schemes. See also Saltzberg, supra note 226 (discussion of software locks which
are technical measures to prevent unauthorized software use):
234. See Bender, supra note 11, at 439.
235. 17 U.S.C. sections 106(1), 106(3) (1982).
236. Id. at section 109(a).
237. See 40 THE RECORD 754, 771-72 (1985). It should be noted, however, that
the first sale doctrine does not affect the prohibition against unauthorized
copying of copyrighted software. See also 17 U.S.C. section 109 (1982).
238 17 U.S.C. section 109(d) (1982).
239. Rice, Computer Products and the Federal Warranty Act, 1985 COMPUTER L.
ANN. 265, 269.
240. See Note, 59 WASH. L. REV. 511, supra note 9, at 519 n.41 (licenses
allow the software producer to maintain tight control over the software which
is necessary to preserve its commercial value).
241. An algorithm is a rigidly defined procedure for solving a specific
problem in a finite number of steps which always yields a solution to the
problem. Bender, supra note 214, at 626 n.1.
242. See National Cash Register Corp. v. Arnett, 554 F. Supp. 1176, 1176
(D. Colo. 1983) (software license prohibited licensee from disclosing any
aspect of the software).
243. Comptroller v. Equitable Trust Co., 296 Md. 459, 467, 464 A.2d 248,
252 (1983) (one purpose of a license agreement is to use trade secret law to
protect certain interests in software). See also 40 THE RECORD 754, 770
(1985) (license agreements are used by software developers to protect trade
secrets in programs).
244. 'Shrink-wrap' or 'tear-me-open' licenses are standard printed licenses
that are enclosed or attached to mass-marketed software in such a manner that
they are visible through the software packaging. Typically, these licenses tell
the software purchaser that opening the software packaging amounts to consent
to the conditions contained in the license. Sherman, supra note 23, at 543.
245. See Sherman, supra note 23, at 545.
246. See supra note 224 and accompanying text. See also Stern, Shrink-wrap
Licenses of Mass Marketed Software: Enforceable Contracts or Whistling in the
Dark?, 7 RUTGERS J. COMPUTER TECH. & L. 51, 55 (1985) (author questions
validity of shrink-wrap licenses).
247. See LA. REV. STAT. ANN. s 51:1964(3) (West Cum. Supp. 1986) and Software
License Enforcement Act, ILL. REV. STAT. ch.29, section 804(3) (Supp. 1986) (both
statutes allow shrink-wrap licenses to prohibit reverse engineering,
decompiling, and disassembling of software which would prevent discovery of
underlying algorithm or process employed by the software).
248. See supra notes 240, 243.
249. See U.C.C. section 2-106(1) (1985) (sale requires passing of title from seller
to buyer). See also Sherman, supra note 23, at 566 (a typical software license
states explicitly that licensor retains exclusive ownership in the software);
Note, 59 WASH. L. REV. 511, supra note 9, at 518 ('Software contracts rarely
involve the passage of title of the software').
250. See Sherman, supra note 23, at 563-80 (copies of typical shrink-wrap
software license); see also, Note, 59 WASH. L. REV. 511, supra note 9, at
518 n.40 (Radio Shack shrink-wrap license).
251. See Insuring Your Satisfaction When Buying Software, PERSONAL
COMPUTING, Sept. 1983, at 153 (author argues that a typical software transaction,
which involves a perpetual license for a one-time fee, is close enough to a sale for
article 2 to apply). See also D. Rice, Computer Products and the Federal
Warranty Act, COMPUTER L. ANN. 265 (1985) (mass-marketed software is obtained
by consumer for a single fee without return of the software expected).
252. See, e.g., Hertz Commercial Leasing Corp. v. Transp. Credit Clearing
House, 59 Misc. 2d 226, 298 N.Y.S.2d 392, 395 (Civ. Ct. 1969), rev'd on
other grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Term 1970). See also
Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46 (1968) (article
2 provision applicable to lease that is analogous to sale).
253. See supra note 239 and accompanying text.
254. See supra note 243 and accompanying text.
255. 665 P.2d 635 (Colo. Ct. App. 1983).
256. Id. at 637.
257. 349 So. 2d 1160 (Ala. 1977).
258. Id. at 1161.
259. See supra note 221 and accompanying text.
260. See, e.g., supra note 176.
261. See, e.g., supra note 175.
262. 298 N.Y.S.2d at 395.
263. See supra notes 239 and 243.
264. See, e.g., supra note 252. See also supra note 260.
265. See U.C.C. sections 1-102(2)(c), 1-104 (1985).
266. See, e.g., RRX Indus. v. Lab-Con., Inc., 772 F.2d 543, 546 (9th Cir.
1985) (software provided with employee training, repair services, and system
upgrading). See also Chatlos Sys. Inc. v. Nat'l Cash Register Corp., 479 F.
Supp. 738 (D.N.J. 1979), aff'd and remanded, 635 F.2d 1081 (3d Cir. 1980)
(seller of computer system provided the services necessary to install the
software provided to the user).
267. See, e.g., In re Community Medical Center, 623 F.2d 864 (3d Cir.
1980) (buyer entered contract for data processing services under which seller
provided training, programming services, and maintenance for computer terminals
installed on buyer's premises which were connected to seller's central
computer, located elsewhere, that serviced the needs of the buyer and other
customers). See also Liberty Financial Mgmt. v. Beneficial Data, 670 S.W.2d
40 (Mo. Ct. App. 1984) (computer hardware and software was used to provide data
268. See R. BERNACCHI & G. LARSEN, supra note 9, at 138 (U.C.C. does not cover
contracts solely for services); Note, The Goods/Services Dichotomy and The
U.C.C.: Unweaving the Tangled Web, 59 NOTRE DAME L. REV. 717, 717 n.3
(1984) (article 2 does not apply to contracts solely for services); Blottner,
Derrico, Weiss & Hoffman v. Fier, 420 N.Y.S.2d 999, 1002 (N.Y. Civ. Ct.
1979) (providing of services is not covered by U.C.C.). See also R. ALDERMAN, A
TRANSACTIONAL GUIDE TO THE UNIFORM COMMERCIAL CODE 7 (1983)
(article 2 is not expressly applicable to service contracts); A. FARNSWORTH,
CONTRACTS 33 (1982) (article 2 not applicable to service contract).
269. Wivagg v. Duquesne Light Co., 73 Pa. D. & C.2d 694, 697 (1975).
270. G. WALLACH, THE LAW OF SALES UNDER THE UNIFORM COMMERCIAL
CODE 11-27 to 11-28 (1981). See also R. Alderman, supra note 268 (many service
contracts involve the sale of goods); Wivagg v. Duquesne Light Co., 73 Pa. D. & C.2d
694, 697 (1975) (few sales of goods are pure sales not involving any services).
271. 459 So. 2d 818 (Ala. 1984).
272. Id. at 820-21. See also Note, Contracts for Goods and Services and
Article 2 of The Uniform Commercial Code, 9 RUT.-CAM. L.J. 303, 303
(1978) (hybrid transactions involving both sale of goods and services common).
273. In Skelton, 459 So. 2d at 820-21, the court applied U.C.C. section 2-315 to
a transaction which the court determined did not involve a sale. The court's
application of this section to a non-sale transaction implies that the court
views the U.C.C. as a true code since section 2-315 is expressly limited to sales by
its explicit references to 'buyer' and 'seller.' Additionally, this conclusion
is supported by the court's reliance on the underlying purpose of the U.C.C.,
stated in section 1-102, to find section 2-315 applicable. Id.
274. 381 F.2d 222 (10th Cir. 1967).
275. Id. at 226.
277. The lack of uniformity in commercial law which would result from
application of different bodies of law to different transactions has compelled
some courts to broadly apply article 2 to both sale and non-sale transactions.
See, e.g., Hertz Commercial Leasing Corp. v. Commercial Credit Clearing House,
59 Misc. 2d 226, 230, 298 N.Y.S.2d 392, 395 (Civ. Ct. 1969), rev'd on other
grounds, 64 Misc. 2d 910, 316 N.Y.S.2d 585 (App. Div. 1970); Hertz
Commercial Leasing Corp. v. Joseph, 641 S.W.2d 753, 756-57 (Ky. Ct. App.
1982); Owens v. Patent Scaffolding-Div. of Harsco, 77 Misc. 2d 992, 354
N.Y.S.2d 778 (Sup. Ct. 1974), rev'd on other grounds, 50 A.D.2d 866, 376
N.Y.S.2d 948 (App. Div. 1975).
278. See Note, supra note 272, at 303-04 & nn.5-6.
280. See Id; Note, supra note 268, at 719 n.14. See also R. ALDERMAN, supra
note 268, at 8 (predominant feature test is majority rule).
281. See RRX Indus. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985) (in
applying the predominant feature analysis to a software transaction involving
both sale of goods and services the court noted that software packages vary and
therefore analysis would have to be applied on a case by case basis).
282. See Note, supra note 268, for a discussion of the various tests applied
to hybrid transactions involving both the sale of goods and the performance of
283. 499 F.2d 951 (8th Cir. 1974).
284. Id. at 960. See also Republic Steel Corp. v. Penn. Eng'g Corp., 785
F.2d 174, 181-82 (7th Cir. 1986) (contract to design, sell and assemble two
steel furnaces was a hybrid sale/service agreement within the domain of article
2 because the contract was predominately for the sale of furnaces).
285. 335 So. 2d 335 (Fla. Dist. Ct. App. 1976).
286. Id. at 336. See also Gross Valentiono Printing v. Clarke, 120 Ill.
App. 3d 907, 458 N.E.2d 1027 (Ill. App. Ct. 1983) (contract to print magazines
was within scope of article 2 since the primary object of the contract was the
resulting magazines which are goods under article 2).
287. 73 Pa. D. & C.2d 694 (1975).
288. Id. at 701-02.
289. See Note, supra note 268, at 718 n.10 (use of different analyses has led
to inconsistent application of article 2 to hybrid transactions).
290. See supra note 22 and accompanying text.
291. See supra note 266.
292. See Cardozo v. True, 342 So. 2d 1053, 1055 (Fla. Dist. Ct. App.),
cert. denied, 353 So. 2d 674 (Fla. 1977) (book is a good).
293. 'Debugging' software means, in computer jargon, eliminating programming
errors in software. See Bender, supra note 11, at 409.
294. See Note, 77 MICH. L. REV. 1149, supra note 9, at 1158-61 (discussion
of typical software support services).
295. See R. ALDERMAN, supra note 268, at 8. See, e.g., RRX Indus. v. Lab-Con,
Inc., 772 F.2d 543 (9th Cir. 1985) (hybrid sale/service contract involving
software determined to be contract for sale of goods within article 2 since
court found sale of goods to be predominant feature).
296. 772 F.2d at 546.
301. See supra note 283 and accompanying text.
302. See supra note 285 and accompanying text.
303. See supra note 287 and accompanying text.
304. See supra note 274 and accompanying text.
305. See supra note 271 and accompanying text.
306. See supra note 285 and accompanying text.
307. See supra note 271 and accompanying text.
308. See supra note 283 and accompanying text. See also U.C.C. section 2-
105(1) (1978) ('goods' under article 2 includes specially manufactured goods).
309. See supra note 287 and accompanying text.
310. See supra note 274 and accompanying text.
311. M. MASON, supra note 57, at 43-44.
312. Holmes, supra note 8, at 21; Note, 77 MICH. L. REV. 1149, supra note
9, at 1163. See also M. MASON, supra note 57, at 42-43 (brief discussion of
service bureaus with regard to attorneys).
313. See, e.g., Matter of Community Medical Center, 623 F.2d 864, 868 n.4
(3d Cir. 1980); Computer Servicenters, Inc. v. Beacon Manufacturing Co., 328
F. Supp. 653 (D.S.C. 1970), aff'd, 443 F.2d 906 (4th Cir. 1971); Liberty
Financial Management v. Beneficial Data, 670 S.W.2d 40, 49 (Mo. Ct. App.
314 See supra note 271 and accompanying text.
315. See supra note 285 and accompanying text.
316. See supra note 274 and accompanying text.
317. See supra note 287 and accompanying text.
318. See supra note 283 and accompanying text.
319. See supra note 279 and accompanying text.
320. See, e.g., Westmont Tractor Co. v. Viking Exploration, Inc., 543 F.
Supp. 1314 (D. Mont. 1982) (lease of business equipment within article 2);
Capitol Assoc., Inc. v. Hudgens, 455 So. 2d 651 (Fla. Dist. Ct. App. 1984)
(equipment lease within article 2); Mieske v. Bartell Drug Co., 92 Wash. 2d
40, 593 P.2d 1308 (1979) (article 2 applied to bailment).
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