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Manufacturer’s Corner: Incorporating Software Into Your Products (Part 1)

This column spends a lot of time talking about Article 2 of the Uniform Commercial Code.  A lot of time.  That’s because it’s a column directed to manufacturers, and Article 2, generally speaking, deals with sales of goods.

But that “generally speaking” glosses over quite a bit, and it can cause us to miss important issues.  Those issues – and specifically the sale or license of software – can be of significant importance to manufacturers.  As the Internet of Things becomes a focal point of manufacturing, the law governing sales of software (especially software incorporated into manufactured goods) will be critical.  That’s why I want to spend a few columns addressing the boundaries of Article 2 with respect to software.  You don’t want to find yourself in a position where you thought you were protected by Article 2, only to discover that your contract looks nothing like you thought it did.

This post will start with the basics.  Let’s see what Article 2 has to say about its own scope.  It applies to “transactions in goods,” but not security transactions (that is, transactions where, say, money is loaned and the lender takes a security interest in the borrower’s goods).  So that presents two questions: what is a “transaction,” and what is a “good?”

Article 2 doesn’t define “transaction.”  It definitely embraces sales, but it’s broader than that.  It probably doesn’t embrace leases anymore, but only because of the enactment of Article 2A.  If you find yourself in a jurisdiction that hasn’t enacted Article 2A, Article 2 will probably govern.  Hawkland also identifies cases applying Article 2 to option contracts, distributorship and exclusive dealing agreements (but only those dealing with distributing or dealing in goods), and franchise agreements.  Article 2 can also apply to acquisition of other businesses, when those are structured as asset purchase agreements.[1]  It can also apply to transactions that contemplate provision of services and goods, but that’s a post in itself.[2]

How about “goods?”  That’s defined to mean “all things (including specially manufactured goods) which are moveable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action.”  Well, okay.  So that clearly includes widgets, but what about closer cases like software incorporated into widgets?

That question will be the focus of this series, but I don’t want to hide the ball from you now.  It’s pretty clear that if you buy a piece of software off the shelf, that’s a transaction in goods.  A license of data may not be the sale of goods though, nor may a transfer of intellectual property rights in software.

I hope you’ll join me in this series, so we can evaluate what law will govern as you make your bold venture into the Internet of Things.

[Here’s a shameless plug.  Are you in St. Louis?  My colleague Pat Whalen will be giving a presentation on data breaches on November 12 at the Frontenac Hilton. You can register here. It should be excellent. If you plan to attend, please drop me a line so I can say hello. – RCH]

[1] So, you know, remember to disclaim your warranties in APAs.

[2] The usual test applied is the “predominant purpose” test.  Kansas has a great way to apply that test: would the services be necessary but for the provision of the goods?  If not, you have a sale of goods.