Hybrid Transactions and the INTERNET of Things: Goods, Services, or Software?

The Internet of Things (IOT) has been described by the American Bar Association as “one of the fastest emerging,” potentially most “transformative and disruptive technological developments” in recent years. The security risks posed by the IOT are immense and Article 2 of the UCC should play a central role in determinations regarding liability for vulnerable IOT products. However, the lack of explicit clarity in the UCC on how to evaluate Article 2’s applicability to hybrid transactions that involve the provision of goods, services, and software has led to conflicting case law on this issue, which contradicts the UCC’s stated goals of uniformity and simplicity. The Article contends that the existing approaches used to evaluate whether Article 2 applies to a hybrid transaction are inadequate for assessing IOT contracts and that IOT technology will increase the complexity and frequency of existing hybrid transactions.

Ultimately, the Article proposes and evaluates four solutions for determining whether Article 2 should apply to IOT transactions to provide uniformity, simplicity, and clarity in this area. The Article argues that a functionality approach is preferable as it effectively considers the unique manner in which services and software are provided in connection with the sale of IOT devices. Under the functionality test, hybrid transactions involving goods, software, and services are subject to Article 2 where the services and software advertised by the manufacturer and retailer are integral to the device’s operations.