New rules for the digital economy

Robert Hahn says most important products of the information age didn't even exist a quarter century ago. It's time to update the legal framework governing these innovations.

Robert Hahn
Robert Hahn Co-founder, Regulation2point0
Robert Hahn, an economist specializing in regulation, is director of economics at Oxford's Smith School of Enterprise and the Environment, a professor of economics at the University of Manchester, and a senior fellow at the Georgetown Center for Business and Public Policy. He is co-founder of Regulation2point0, a site hosting documents and commentary on economic regulation.
3 min read
Personal computers. Cell phones. Digital cameras. PDAs. The most important products of the information age didn't even exist a quarter century ago. Yet the legal framework governing commerce in these fabulous innovations--known as the Uniform Commercial Code--dates back to a world in which American homes shared "party line" telephones and radio was still viewed as a technological marvel.

Indeed, the UCC was a creature of the late 1940s, reflecting America's transition from an agricultural economy to a manufacturing economy in which the special legal issues arising from mass production were paramount. Today, new legal rules that are specifically built to meet the demands of the new economy are needed.

In pursuit of this goal, a well-regarded, nonpartisan organization known as the National Conference of Commissioners on Uniform State Laws will gather in Washington, D.C., this week to put the finishing touches on rules that would apply to purchases of software, computer databases and online information. Their work to complete what has been dubbed the Uniform Computer Information Transactions Act (UCITA) won't score many headlines, but the impact could be far-reaching.

Consider the enormous operational costs and management headaches that inconsistent interpretations of essentially obsolete state laws can impose on information technology businesses. When laws vary across states, companies must research multiple statutes and determine the relevant differences among them.

For large firms with huge legal staffs, this obligation is laborious, but not insurmountable. But for smaller, entrepreneurial firms, the burden of having to learn and understand 50 distinct commercial codes can be overwhelming. While many consumers believe a few big firms dominate the software industry, start-ups remain the rule--not the exception--in this highly innovative industry.

According to the latest census data, 1,075 out of 1,144 businesses selling pre-packaged software are small firms. The Internet is a boon for these small firms because the Web abolishes borders for commerce and provides a built-in distribution system. Software can be licensed and delivered to customers over the Web with just a few clicks of a mouse. But software can also be copied and appropriated for personal use almost effortlessly. The new rules would allow companies to enforce online software licensing contracts through a uniform body of state law.

The new laws promise big gains for business and for consumers. A uniform state law would lower transaction and legal costs for companies, yielding savings that are likely to be passed on to consumers in the fiercely competitive markets for information products. With uniform laws, suits brought in one state could serve as precedents for suits in other states, allowing a coherent body of court rulings and legal interpretations to build more rapidly in new areas like Internet transactions. A uniform state law would prevent "forum shopping," where lawyers seek out sympathetic courts, thereby eliminating a deadweight cost of litigation.

Some consumer groups, fearful that any new legal structure that serves the interests of sellers must damage buyers, have balked at the new rules. But the new law explicitly assures all existing state consumer protection safeguards would remain in force, as would federal consumer law.

In fact, even a casual look suggests that the new code is a win-win proposition. A new uniform state statute that standardizes commercial rules for software and computer information products would reduce business uncertainty by giving high-tech firms a fair, stable and predictable set of rules by which to operate. It could increase the use of new computer information products, spurring economic productivity. It would benefit consumers through lower prices without sacrificing any consumer rights. And it would help demonstrate that our legal system can be adapted to fit the needs of the new economy.