FTC Staff Files Comment About Proposed Amendment to Uniform Commercial Code

The staff of the Federal Trade Commission’s Bureaus of Consumer Protection and Competition and its Policy Planning Office filed a comment on October 30, 1998, with the National Conference of Commissioners of Uniform State Laws (NCCUSL) and the American Law Institute (ALI) about a proposed Article 2B for the Uniform Commercial Code entitled Software Contracts and Licenses of Information.

The comment addresses the possible impact proposed Article 2B could have on consumer welfare, in particular with regard to consumer protection and competition, in the marketplace for software and other information products. The staff submitted the comment to suggest revision of the current draft dated August 1, 1998, to help alleviate any potential adverse consumer impact.

Recommendations to Improving Article 2B’s Licensing Provisions:

If a licensing model similar in form to that of the current draft is adopted for consumer transactions, the staff suggests consideration of consumer protection improvements to Article 2B to make it consistent with the Nation’s consumer protection laws. The comment focuses on six such potential improvements. First, the staff recommends the inclusion into the draft of a flexible public policy restriction, allowing courts to invalidate mass market license/contract terms in appropriate cases. Second, the staff suggests that Article 2B specifically incorporate a public policy protecting “fair use” of the software product by consumers. Third, the comment recommends that Article 2B require pre-sale disclosure of all material license terms, that is, disclosure of those terms that are material to a consumer’s decision to purchase a product. Fourth, the staff suggests that Article 2B’s definition of "conspicuous" depend on the individual facts and circumstances of a given transaction, and cannot be precisely defined as it is set forth in Article 2B. Fifth, the staff suggests that two additional restrictions on the use of self-help by licensors be included in Article 2B: a restriction on self-help where the technique used might intrude on a consumer’s reasonable expectation of privacy and required warnings to consumers that self-help might be used. Finally, the staff is concerned about Article 2B’s default provision that could imply that licensors may not be held to their promises or that licensors can override, in a boilerplate post-sale warranty disclaimer, promises expressly made or implied by the licensor’s words or deeds.

Ways to Facilitate Electronic Commerce:

"The staff supports the efforts of NCCUSL and ALI to establish a legal framework to facilitate electronic commerce. ... We are concerned, however, that the approach used in draft Article 2B allocates too much risk to consumers in the event of fraud (including new forms of identity theft) or transaction error, which, in turn, might deter, rather than advance, development of electronic commerce. ... Consumers are often the parties least able to assess and absorb the risk of fraud or error in transactions. Under Article 2B, a consumer could be liable for the actions of a third-party, bad actor who sends electronic records in the name of that consumer. ... NCCUSL and ALI may want to evaluate further the issue of consumer liability for unauthorized electronic transactions."

Balance of Innovation and Competition Incentives:

"The staff is concerned that Article 2B, as currently drafted, is inconsistent with existing intellectual property and antitrust laws and policies. Some provisions in Article 2B implicitly endorse a contracting/licensing structure that allows software and other information to be distributed with significant restrictions on users’ rights to compete. Those restrictions could be contract/license terms that explicitly forbid competition with the seller/licensor of the good or terms that restrict in some manner ?reverse engineering,’ i.e., the detailed analysis by one firm of another firm’s product in order to produce a related good. Both sorts of restrictions could unreasonably restrain trade, constitute misuse of intellectual property, and/or violate state trade secret statutes."

The Commission vote to file the comment was 4-0.

The comment expresses the views of the staff of the FTC’s Bureaus of Consumer Protection and Competition and the Policy Planning Office and not necessarily the views of the Commission or any individual Commission.

Copies of the full text of the comment are available from the FTC’s web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 6th and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382- 4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. V980032)