July 7, 1998
TO: Secretary, Federal Trade Commission FROM: Professor Jean Braucher, University of Arizona College of Law As you are no doubt aware, the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL), which together sponsor the Uniform Commercial Code (UCC), are currently working on a proposed new Article 2B of the UCC (on licensing of software and information). This project includes provisions on electronic contracting. The sponsors have ambitions to have it serve as a model for the law of electronic contracting generally. In addition, NCCUSL is working on a proposed Uniform Electronic Transactions Act. The current drafts of both of these projects are available at <http://www.law.upenn.edu /library/ulc/>. I am a contracts and commercial law professor with a particular interest in consumer issues. I am also an ALI member who has been working with many others to attempt to improve Article 2B. My focus has been to try to make this new UCC article conform more to modern principles of consumer protection, in particular to recognize the importance of effective pre-transaction disclosure of terms, whether transactions are made by traditional or electronic media. To that end, I introduced a successful motion urging fundamental revision of Article 2B at the May annual meeting of the ALI. NCCUSL will meet for its annuaI meeting at the end of this month and will also be taking up Article 2B. I am very glad that the FTC is concerned with ensuring that effective disclosure is made to consumers in transactions initiated by electronic media because if Article 2B is enacted as currently drafted, it will need to be preempted by federal law to protect the interests of consumers. Furthermore, Article 2B is likely to influence the development of state law generally concerning transactions made on electronic media, and the FTC might soon find that it will need to preempt other state law as well. I am submitting these comments primarily to summarize for you the debates concerning disclosure of terms that have occurred in the Article 2B project and to highlight the difference between the FTC's approach to "conspicuousness" (which I believe is sound) and that taken in proposed Article 2B. 1. The FTC's "general effective communication performance standard" of conspicuousness. In Part II.C. 5. of the Notice of Request for Public Comment, the Commission proposes that rules and guides as to type size and prominence criteria be interpreted as also requiring compliance with "the general effective communication performance standard." This is a desirable clarification. The same question is raised by the UCC's definition of conspicuous, UCC Section 1-201(10), where there is a general standard ("so written that a reasonable person against whom it is to operate ought to have noticed it") and also specific suggestions of ways to make disclosures conspicuous--large print or contrasting type or color. Courts have favored the approach you suggest--that the general standard must in any event be met. See e.g. Hunt v. Perkins Machinery Co., Inc., 352 Mass. 535, 226 N.E. 2d 228 (1967) (term on the back of a form was not conspicuous even though in contrasting type). This issue of compliance with a general standard has been raised in the Article 2B drafting process. Article 2B contains a definition of conspicuous in Section 2B-102(9) (NCCUSL Annual Meeting Draft, July 1998), using media-neutral language such as "record" instead of "writing" and "text" instead of "print." But Article 2B has not made the clarification that the general standard must be met, leaving the definition of conspicuous open to the interpretation that it endorses a "safe harbor" approach. Indeed, the Reporter's Notes, which may become Official Comments, give support to this interpretation by stating that illustrations of means of making terms conspicuous "establish safe harbors intended to reduce uncertainty and litigation. Absent exceptional circumstances, a term that conforms to a safe harbor is conspicuous." While Article 2B thus provides certainty for drafters of forms, the uncertainty of its approach is whether disclosures will be noticeable. A term in contrasting type that is only reached after hyperlinking and then scrolling through three pages of text is unlikely to be noticed. 2. Unavoidability of disclosures as crucial to conspicuousness. In Part II.C.4.a. of the Notice of Request for Public Comment, the Commission expresses the views that disclosures should be unavoidable to be conspicuous and that consumers should not have to take actions such as scrolling or clicking to a link to reach them. This is a sound position. Article 2B, however, takes the very different position that an entire agreement can be available only by link and that a party can agree to a never-displayed contract by clicking on an electronic button marked "I agree." See Section 2B-111 and Reporter's Note 4.c. (stating that there is an "opportunity to review" terms if they can be accessed by hyperlink). In addition to the problem that contract terms available only by link will often never be viewed, use of clicking as a substitute for a signature is undesirable. Computer users click hundreds of times a day. Clicking does not have the same significance to consumers as signing a contract. Some electronic equivalent of a signature is needed, and it should be more than a click--perhaps typing "Signed by (name of consumer)". 3. Importance of Pre-transaction Availability of Disclosures and Terms. It is hard to see how terms can be conspicuous if consumers do not see them until after purchase. In order for a market in warranty terms to work, for example, consumers at a minimum must have access to terms before they make purchase decisions. In recognition of this important point, the Commission requires sellers and warrantors to take various steps to make terms available to consumers. See 16 CFR Section 702, Pre-Sale Availability of Written Warranty Terms. Disclosures required in advertising also are designed to reach consumers before a decision is made to enter a transaction. Section 702 of 16 CFR was written well before the Internet became a means for consumers to shop for or to order products. It is oriented to distribution through retail stores and mail and telephone order, followed by surface delivery by mail or private delivery company. Pre-sale availability of terms and disclosures is not always easy in these older distribution systems, but the Commission has required such steps as posting of signs, availability on request, and putting terms and disclosures in catalogs. Where Web-based catalogs are used, disclosure of terms there would be an additional place where consumers might see terms even though they make transactions by buying in a store or order over the phone. A Web catalog with terms and any required disclosures provides a convenient means of shopping. Article 2B, however, does not require pre-transaction availability of terms. In Sections 2B-207 and 2B-208, it authorizes presentation of terms during the initial performance or use of a product. Thus, where software is purchased in a store or over the phone, the terms can be in the box or on the diskette, and actions such as opening a package, clicking "I agree" to an undisplayed electronic contract on a diskette, or even using the product (see Reporter's Note 4b to 2B-111) can operate as legally effective "assent." Article 2B's purported "solution" to the lack of access to terms prior to the decision to enter the transaction is to give a right of refund, under Section 2B-208(b), to mass-market purchasers, but only if they have not opened or used the product or clicked "I agree." The Article 2B approach would effectively undermine competition in terms. If a consumer must shop and make a decision to purchase before seeing terms, the right of refund does not compensate the consumer for wasted research and decision costs. Article 2B even permits post-transaction availability of terms in on-line orders. This is already a common practice. Even though it would be easy to display terms prior to the order in on-line transactions, sellers of software often put the terms in a box or on a diskette sent later, after order and payment. The Commission should require in on-line transactions that terms and disclosures be given before order and payment. Furthermore, longer term it would be desirable for the Commission to investigate the feasibility of developing requirements for machine-readable language and term fields to facilitate shopping and thus competition. (A consumer then might be able to initiate a computer search for desired terms, without the need for visual inspection of many different contracts.) Because of its authorization of post-transaction disclosure of license terms, Article 2B raises the issue whether its approach is already preempted by the Magnuson-Moss Warranty Act. Magnuson-Moss applies to written warranties given in the sale of consumer products. See e.g. 15 U.S.C. Section 2301(1) and (6) (defining consumer product and written warranty) and 16 CFR, Section 700.1(a) ("Where it is unclear whether a particular product is covered under the definition of consumer product, any ambiguity will be resolved in favor of coverage.") Article 2B applies to "licenses" of software and information. Under Magnuson-Moss, is a "license" a sale and is software or information a "product"? Article 2B is only proposed law; currently, most courts treat software transactions as sales even when called "licenses." Would the enactment of Article 2B change the meaning of "sale" in Magnuson-Moss, excluding licenses? Also, there is a question whether a software or information product meets the Magnuson-Moss definition of consumer product, covering "tangible personal property." 15 U.S.C. Sectioon 2301(1). Software and information are often transferred on diskettes, which are tangible. In addition, even in on-line delivery, software and information have to be transferred by perceivable electronic signals and in this sense are tangible. To avoid all these issues, the FTC should clarify that Magnuson-Moss applies to software and information products, even if the transaction is called a "license" of use (not a transaction-type that has meaning to consumers) rather than a sale of a copy. 4. Other points.
5. Public Workshop. I would be interested in participating in a public workshop. |