Not So Good: the Classification of "smart Goods" Under Ucc Article 2
| Citation | Vol. 34 No. 2 |
| Publication year | 2018 |
Not So Good: The Classification of "Smart Goods" Under UCC Article 2
Chadwick L. Williams
Georgia State University College of Law, CWilliams257@student.gsu.edu
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Refrigerators can now tweet.1 Today, almost sixty years after the states widely adopted the Uniform Commercial Code (UCC), the line between goods and services is more blurred than ever.2 When the UCC was drafted, a good was the simple opposite of a service.3 A good was something "movable" and tangible,4 and a service was not.5 Article 2 of the UCC, which governs sales, limits its scope to goods.6 However, because Article 2 was drafted long before the proliferation of so-called "smart goods,"7 courts continuously struggle to determine when a smart good falls within Article 2's scope.8 Courts have developed different tests over the years to deal with contracts
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containing a mixture of goods and services,9 but those tests produce questionable results when applied to smart goods.10 In the late 1990s, drafters attempted to address these issues with an ill-fated addition to Article 2 that ultimately failed.11 Still today, as software and tangible goods become more intertwined,12 software's legal status remains a fundamental, yet unanswered, question.13 This unresolved question impacts consumers directly;14 whether a contract falls within the scope of Article 2 affects customers' available warranties and remedies.15
The following Note discusses the classification difficulties posed by modern goods with embedded software and services. Part I explains the history of the UCC, the past efforts to address the difficulties, and the issues that still remain. Part II analyzes previous attempts to resolve the issue and courts' current solutions to these classification difficulties. Part III proposes a contemporary solution to these modern challenges and discusses how such a solution might be implemented.
I. Background
In the early 1940s, two organizations, the National Conference of Commissioners and the American Law Institute (ALI), joined together to develop a comprehensive body of law to govern commercial transactions.16 This commercial code embraced all
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modern developments in other attempted uniform sales codes17 and created new provisions to address recognized commercial problems.18 If adopted by the states, this collection was intended to replace the common law of contracts for commercial transactions.19 This collection was the UCC.20 Following its initial introduction, the UCC went through many drafts and redrafts.21 Finally, after years of debate and revision,22 the official edition of the UCC was published in October 1952.23 By 1967, forty-nine states had adopted the UCC to some degree.24
With the states' mass adoption of the UCC,25 the UCC preempted the common law of contracts whenever the UCC applied.26 Article 2 of the Code applies to the sale of goods.27 A "good" is defined as "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale . . . ."28 Therefore, Article 2 governs the enforcement of any contract concerning tangible "things" which are "movable."29 The application of Article 2 is simple when the contract in controversy exclusively concerns goods. However, contracts are often mixed, with services and goods intertwined within the agreement.30 The Code is silent on the treatment of mixed goods and service contracts;31 these "hybrid contracts" have troubled courts since the adoption of the UCC.32 To deal with this issue, courts have developed several different tests.33
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A. The Hybrid Tests
The primary issue courts face with hybrid contracts is determining whether Article 2 applies,34 and, if so, how much of the contract falls within the Article 2 scope.35 The test used differs by jurisdiction.36
1. The Predominant Factor Test
A majority of jurisdictions use the predominant factor test to resolve hybrid contract scope issues.37 Even if a contract contains a mixture of goods and services, if its "predominant factor, [its] thrust, [its] purpose, reasonably stated, is . . . a transaction of sale," then Article 2 of the UCC applies.38 Once the court determines the "predominant purpose" of the contract, either the whole contract is governed by Article 2 or none of it is.39
Courts analyze several factors to determine if a hybrid contract's "thrust" and "purpose" are truly a sale of goods.40 The factors are (1) the language of the contract; (2) the manner of billing; (3) the allocation of costs; and (4) the nature of the final delivered product.41
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First, if the contract contains language like "purchase order," then courts consider that contractual language to be more indicative of an Article 2 transaction in goods.42 Second, if the contract mandates a lump sum payment at delivery, that language is more indicative of a contract for goods than services.43 Third, it is more indicative of a contract for goods if most of the costs are in exchange for the tangible portion of the contract.44 Finally, if the final product delivered is movable and tangible, the contract would likely fall within the scope of Article 2.45
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2. The Gravamen Test
The gravamen test is a simpler alternative to the predominant factor test.46 Under this test, the court looks at the entire contract in the context of the facts and circumstances of the case.47 If the hybrid contract, in light of the dispute, seems like its essence was for the sale of a good, then Article 2 applies.48 If the contract, in light of the dispute, seems like it was actually for the contracting of services with some goods implicated, Article 2 does not apply.49 In the gravamen test, like the predominant factor test, either all of the contract is
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governed by Article 2 or none of it is.50 Although the majority of courts use the predominant factor test, courts remain divided on which test best applies Article 2 to contracts only partially within its scope.51
B. The Life and Death of the Uniform Computer Information Transactions Act
Contracts for the sale of software challenged the courts even more than the hybrid contracts that came before.52 A few decades after the wide adoption of Article 2 marked the dawn of the computer age.53 Courts attempted to apply the same hybrid tests to contracts for the sale of software.54 Results varied greatly.55 Although software was technically tangible and movable in compact disc form, the true essence of a contract for software was for the information on the tangible disc.56 Courts continue to struggle to consistently apply the traditional hybrid tests to software contracts.57
In 1999, recognizing the widespread confusion software was causing,58 the National Conference of Commissioners on Uniform State Laws and the ALI promulgated the Uniform Computer Information Transactions Act (UCITA) to govern transactions in computer information.59 The UCITA initially began as a proposal for an addition to the UCC, which would be known as Article 2B.60
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Displeased, the ALI withdrew early in the process.61 The UCITA's development continued separately from the UCC.62
The UCITA attempted to address the software contract problem by adjusting the scope of Article 2.63 If the UCITA was adopted, it would apply to "computer information transactions."64 A computer information transaction is "an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information."65 Computer information is "information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer."66 The UCITA expands the term "computer information" to include "a copy of the information and any documentation or packaging associated with the copy."67 Therefore, if the UCITA was adopted, all software would be removed from the scope of Article 2 and be governed by the UCITA.68 However, the UCITA was widely considered overly complex and poorly conceived.69 Additionally, competing interest groups created a deadlock in further UCITA adoption.70
As a result of its wide criticism, only Virginia and Maryland adopted the UCITA.71 Since then, Iowa, North Carolina, Vermont, and West Virginia actually adopted anti-UCITA legislation,72
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nullifying any choice of law provisions applying the UCITA.73 In 2003, the National Conference of Commissioners on Uniform State Laws announced that it would no longer seek further adoptions of the UCITA.74 As a result, there is no national consensus on whether software is a good or a service.75 Software's legal status remains a fundamental, yet unanswered, question.76
C. The Dawn of the Smart Good
In recent years, a new layer of ambiguity has emerged in the world of hybrid contracts. The distinction between good and service continues to blur as technology develops.77 Today, goods can have integrated software78 and services.79 Some goods now have software embedded in them; these types of goods are known as "smart goods."80 Examples include a car with a computer chip controlling its automatic braking system81 and a printer with integrated software.82 The classic hybrid tests of years past are becoming less capable of classifying modern goods.83 The classification of goods has a huge impact on the remedies available to the injured party.84 As goods become smarter, "new thinking is needed and lines will need to be drawn to determine how to treat the goods containing . . . embedded software."85
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II. Analysis
The theoretical classification of a smart good has a huge impact on the consumer.86 The source of this effect is largely due to the nature of the UCC,87 which conceptualizes contracts differently than traditional common law.88 The common law of contracts, which invokes the principle of...
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