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Lecture 9: Commercial Transactions


Lecture 9: Commercial Transactions Mary Jo Dively, Vice President and General Counsel Carnegie Mellon University What s a Commercial Transaction? – PowerPoint PPT presentation

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Title: Lecture 9: Commercial Transactions

Lecture 9 Commercial Transactions
  • Mary Jo Dively, Vice President and General
  • Carnegie Mellon University

Whats a Commercial Transaction?
  • Sales Contracts
  • Generally for goods (toasters, cars, etc.)
  • License Contracts
  • Generally for intangibles (software, electronic
    media, etc.)
  • Banking Transactions
  • Negotiable instruments (checks, promissory notes,
    letters of credit, warehouse receipts, bills of

Sales vs. Licenses
  • Sales
  • Buyer receives title to goods
  • Little or no continuing relationship between
    buyer and seller
  • Terms of transaction flow from these
    principlesdelivery, performance, remedies
  • Licenses
  • Licensee receives bundle of rights as specified
    in license contract usually right to use along
    with other specified rights
  • Title does NOT pass
  • Continuing Relationship between Licensor and

Uniform Commercial Code
  • Principal commercial law in the US for past 50
    years codified then existing case law
  • Enacted by each STATE variances among the states
  • Separate Articles address different types of
    contracts (for example, Article 2 covers Sales of
    Goods, Article 9 covers Secured Transactions)

UCC Article 2
  • Covers sales of goods current draft excludes
    pure information contracts
  • Sets up a basic framework for how to create an
    enforceable contract
  • Overriding Principle Freedom of Contract
  • Default Rules other than a handful of mandatory
    provisions, all provisions may be overridden by
    specific agreement between the parties to the
    particular contract

Article 2 Offer and Acceptance
  • A contract for the sale of goods may be made in
    any manner sufficient to show agreement,
    including conduct by both parties which
    recognizes the existence of such a contract
  • Enforceable forms Writing, Oral, Conduct (all
    with varying requirements)

Article 2 Warranties
  • Basic Theme UCC states that Seller makes
    various promises about the quality of the product
    being sold
  • If Seller does not wish to make such promises, it
    must DISCLAIM them, in the format provided by
    Article 2
  • If Seller does NOT disclaim, it is deemed to have
    provided such warranties
  • Goal Put Buyer on notice Buyer may then make
    decision to purchase a different product

Is UCC Article 2 Sufficient for Information
  • Information Products manufactured and distributed
    differently than mass marketed goods License v.
  • Article 2 does not provide a sufficient framework
    for information contractingits provisions do not
    work mechanically for most information products
    which are licensed

What is NCCUSL?
  • Non profit body of approx. 350 lawyers, divided
    equally among private practitioners, law
    professors and judges
  • Responsible for sophisticated uniform
    legislationUCC Article 2 for example
  • Drafting Process
  • States individually consider each uniform law

My Role
  • Acted as an ABA Advisor to the UCITA Drafting
    Committee attended every meeting of the DC
  • Chaired the ABA committee that served as research
    resource for UCITA and UETA Drafting Committees
  • Also attended most meetings of UETA Drafting
    Committee and
  • After approval, and end of my ABA service, was
    engaged to represent a client to assist in state
    enactments of UETA and UCITA
  • Recently appointed a NCCUSL Commissioner for

The Uniform Electronic Transactions Act
  • State Law which is enacted in 40 states
  • Purpose
  • make sure that transactions in the electronic
    marketplace are as enforceable as transactions
    memorialized on paper and with manual signatures
  • without changing substantive rules of law
  • an electronic record of a transaction is the
    equivalent of a paper record, and that an
    electronic signature will be given the same legal
    effect, whatever that might be, as a manual

UETA Basic Rules
  • A record or signature may not be denied legal
    effect or enforceability solely because it is in
    electronic form.
  • A contract may not be denied legal effect or
    enforceability solely because an electronic
    record was used in its formation.
  • Any law that requires a writing will be satisfied
    by an electronic record
  • Any signature requirement in the law will be met
    if there is an electronic signature

UETA, continued
  • The rest of UETAs rules serve these four basic
    rules, and attempt to answer basic legal
    questions about the use of electronic records and
  • Parties must agree to conduct business
    electronicallyno one can be forced to do so
  • Delivery
  • Attribution

UETA Sending Electronic Records
  • an electronic record is sent when it
  • (1) is addressed properly to an information
    processing system that the recipient has
    designated or uses for the purpose of receiving
    electronic records
  • (2) is in a form capable of being processed by
    that system and
  • (3) enters an information processing system
    outside the control of the sender or enters a
    region of the information processing system
    designated or used by the recipient which is
    under the control of the recipient
  • An electronic record is received . . . Even if no
    individual is aware of its receipt

UETA Transferable Records
  • The law of negotiable instruments (checks,
    drafts, promissory notes, etc.) pays great
    attention to transferability and the holder in
    due course (rightful possessor without knowledge
    of fraud or defect)
  • A negotiable instrument is token money (rightful
    possession is equivalent to ownership)
  • Negotiable instruments are mde electronic through
    transferable records
  • A transferable record is an electronic record
    that would be a negotiable instrument if it were
    wirtten and which the issuer has expressly agreed
    is a transferable record

The Uniform Computer Information Transactions Act
  • A uniform statute designed to codify current law
    and practice in contracts for computer
  • Scope is limited to transactions in Computer
  • NOT intended to answer every specific question,
    but to provide a structure for courts to analyze
  • Special rules for mixed transactions

  • UCITA was enacted in Virginia after one year of
    study by a special legislative committee and
    consideration of numerous amendments, which were
    rejected by VA legislature. It was then reviewed
    by the legislature for a year thereafter, with no
    meaningful amendment, and took effect in 2000

  • UCITA was enacted in 2000 by the Maryland
    legislature after full debate by Committees of
    House and Senate, and consideration of numerous
    amendments, almost none of which were accepted

UCITA Applies to Transactions in Computer
  • An agreement or the performance of it to create,
    modify, transfer, or license computer information
    or informational rights in computer information.
  • 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

Exceptions UCITA does not apply to
  • financial services and insurance services
  • agreements related to the creation, performance
    etc. of movies and sound recordings
  • employment contracts
  • transactions where computer information is de

Special Rules for Mixed Transactions with Goods
  • CI Goods UCITA applies to the CI, not the
    Goods Article 2 applies to the goods
  • BUT, if CI is embedded software, and goods are
    not a computer or a computer peripheral, and
    access to the CI is not ordinarily a material
    purpose of such a transaction, then UCITA does
    not apply to the CI otherwise, it does

Formation Rules
  • Allows contracts to be made computer to computer,
    or human to computer
  • Updates concepts to provide for electronics (e.g.
    definition of receipt is now whenever a message
    gets to recipients designated information
    processing system)
  • Codifies existing case law of shrinkwrap/clickwrap

Section 105 Breaking Ground
  • 4 Important Provisions
  • Federal Law Preempts
  • Terms Cannot Violate Public Policy
  • Terms which prohibit lawful public comment are
  • UCITA does not apply to IP noticesimportant
    provision for free software

Fundamental Public Policy Rules
  • Terms or Records which violate fundamental public
    policy of a state are unenforceable
  • Examples Innovation, competition, fair comment,
    fair use
  • Comments provide guidance for courts on how to
    apply 105

Fair Comment
  • Copy of CI in final form made generally available
  • Prohibits clauses which prohibit otherwise lawful
    public comment
  • Subject to other laws which legitimately support
    confidentialityi.e. trade secrets,
    non-disclosure, etc.

The Rules on Shrinkwrap Contracts
  • Has been a controversial topic
  • Many alternatives considered
  • The Result A licensee may not manifest assent
    to the terms of a license until it has had an
    opportunity to review the terms. If the license
    is presented post payment, then the license must
    provide a cost free right of return for the

Clickwrap Contracts
  • Formation Rules are the same as
    Shrinkwraps--licensee must have opportunity to
    review terms before manifesting assent
  • Safe harbor to encourage pre-transaction
    disclosure of terms in Internet transactions

What is Manifesting Assent?
  • You manifest assent if, after having an
    opportunity to review a record or term, you
    authenticate (sign) the record or term, or
    intentionally engage in conduct or make
    statements with reason to know that the other
    party or its electronic agent may infer from the
    conduct or statement that you assent to the
    record or term.

What is an Opportunity to Review?
  • A person has an opportunity to review a record or
    term only if it is made available in a manner
    that ought to call it to the attention of a
    reasonable person and permit review.
  • An electronic agent has an opportunity to review
    only if the record or term is made available in a
    manner that would enable a reasonably configured
    electronic agent to respond.

Choice of Law and Choice of Forum
  • Very important in cyberspace, where you might not
    know where the other party is, or they might be
  • Follows existing common law
  • Choices of law are enforceable, but special
    protections for consumers
  • Choices of forum are enforceable as long as not
    unreasonable and unjust

  • UCITA creates statutory implied warranties, for
    first time, in information transactions
  • Warranties created
  • Noninterference and Noninfringement
  • Merchantability of computer program
  • Informational Content
  • Fitness for licensees purpose, system integration

UCITA Controversies
  • Consumer Advocates sought broad consumer
    protections in UCITA rather than leaving to
    individual states to develop, as has been
    traditional for CL
  • Original Positions on Reverse Engineering, Public
    Comment and Electronic Self Help were
    significantly opposed
  • Original positions on default rules for number of
    users and duration of license were significantly
  • Some law professors are opposed in principle to
    shrinkwrap contracts, despite the courts
    repeated and unchanging endorsement of same

Key Changes in Response to ABA
  • UCITA now expressly forbids clauses in licenses
    which prohibit most reverse engineering
  • UCITA now expressly forbids clauses in licenses
    which prohibit public comment about the
    performance of software
  • UCITA now expressly bans the use of electronic
    self help in all cases
  • The default rules on number of users and duration
    of license have been deleted

UCITAs future
  • Unclear at this time
  • Courts continue to express need for a law to
    govern information contracting, and to validate
    key UCITA approaches
  • If UCITA is not passed in a critical number of
    states, it is likely that federal legislation
    will be introduced on the same subjectsimilar to
    what happened with UETA and E-Sign

Concluding Thoughts
  • The UCITA controversy, the reaction of the
    courts, and, to a certain extent, the differences
    between UETA and E-Sign, continue to underscore
    the need for information contracting law, and the
    difficulty in developing provisions which can
    satisfy all constituencies
  • Meanwhile, new concerns on the horizon
  • Digital Rights Management
  • Anti-circumvention laws
  • Protection for libraries

Q A?
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