2-204 - Formation in General - covers electronic contract

1
Current Issues in Electronic Contracting
E-Commerce Legal and Practical Issues

• Stephen M. Foxman
• Philadelphia
• PBI - December 2, 2005

2
Applicable Contract Law

• UCC - Sale of Goods
• 2-204 - Formation in General - covers electronic
  contracts
• e-mail contracts statute of frauds issues
• trading agreements - EDI
• Uniform Electronic Transactions Act
• effective in PA January 15, 2000
• adopted in 47 states and D.C. by May 2005

3
E-Sign, UCITA and State Laws

• Federal E-Sign Law
• preempts state law unless official UETA (or
  consistent law) adopted
• unique versions of UETA may be preempted
• Uniform Computer Information Transactions Act
  (UCITA)
• adopted in only VA and MD
• resisted based on perceived consumer issues
• State general contract law

4
UETA Validates Electronic Contracts, Signatures
and Records

• Contrast with UCITA - UCITA limited to agreements
  that create, modify, transfer, or license
  computer information
• covers software licensing and online distribution
  of information
• overlaps with UETA and covers contract formation
  and other issues dealt with by UCC for sale of
  goods

5
UETA Applies in PA

• Applies to electronic record or signature
  created, generated, sent, communicated, received
  or stored after effective date (1/15/2000)
• Virtually Identical to NCCUSL UETA
• PA version places burden on party disputing
  non-consumer transaction to prove invalidity if
  parties agreed on security procedure or specific
  protocol in advance (Chapter 7)
• PA version contains requirement of consumer
  consent to electronic contracting in certain
  cases (Chapter 9)

6
UETA Definitions

• Electronic record created, generated, sent,
  communicated, received or stored by electronic
  means
• Electronic signature electronic sound, symbol or
  process attached to or logically associated with
  a record and executed or adopted by a person with
  the intent to sign the record
• includes mouse click on I Agree, voice mail
• Electronic all electronic technology including
  mobile phone, fax, etc.

7
UETA Definitions

• Security Procedure procedure to verify that
  electronic signature, record or performance is
  that of a specific person or for detecting
  changes or errors includes codes, identifying
  words or numbers, encryption, callback or other
  acknowledgement

8
Scope of UETA - Sec. 104

• Does not cover wills, codicils and testamentary
  trusts
• Does not cover UCC transactions, except for
• 1-107 (waiver or renunciation of claim or right
  after breach)
• 1-206 (statute of frauds for personal property
  not otherwise covered)
• Article 2 (sales) Article 2A (leases)
• Transactions covered by Act are also subject to
  other applicable substantive law

9
Effect of UETA

• Electronic transactions treated the same as if in
  written form - record or signature may not be
  denied legal effect because of electronic form -
  (303)
• If a law requires a writing, an electronic record
  or signature satisfies the law - (303)
• Non-waivable right to refuse to conduct business
  by electronic means - (301)
• E-mail agreement of sale for sale of Liberty
  Place? problem of unread consumer adhesion
  contracts

10
Application

• Applies only to transactions between parties, who
  have agreed to conduct transactions by electronic
  means (301) may be implied by conduct
• Electronic record is not enforceable against
  recipient if sender inhibits ability of recipient
  to print or store record (304)

11
Requirement to Send Written Information

• Requirement is satisfied if sent as electronic
  record capable of being retained by the recipient
  at time of receipt (304)
• Does not alter effect of other laws requiring
  particular method of posting, sending or
  formatting records (e.g., posting of eviction
  notice on property) (304)

12
Attribution - Sec. 305

• Record attributable to a person if act of that
  person - may be shown in any manner, including by
  efficacy of security procedure
• Effect of electronic record or signature
  determined by context and circumstances
• Party alleging other party generated record or
  signed has burden of showing record or signature
  was act of other party or agent, BUT...

13
Attribution - Ch. 7

• If parties adopt security procedure and it is
  relied upon, burden shifts to disputing party to
  show unauthorized use or procedure misused
  despite authorization (701)
• Ch. 7 not applicable to consumer transactions

14
Errors in Transmission - Sec. 306 Ch. 7

• Automated transaction (electronic agents)
• may be avoided by prompt action and return of
  consideration if no opportunity to prevent error
• Not automated
• if no agreed security procedure, parties
  contract or other law, including law of mistake,
  controls
• if agreed security procedure, treated as not
  having been altered (702), unless parties did
  not conform to procedure (306)

15
Notarization and Acknowledgements

• Electronic signature of person authorized to
  notarize or acknowledge will be effective 30 days
  after adjustment of PA Notary Public Law
• so far, law not changed

16
Authentication and Digital Signatures

• Authentication of user What you know
  (password) What you have with you (smart card)
  What you are (biometrics)
• Digital signatures signed with encrypted
  private key and decoded with public key hash
  function to protect against alteration before
  receipt
• Use of encryption to protect transmissions and
  stored confidential information
• Single sign on - Passport and Liberty Alliance

17
Retention of Records - Sec. 308

• If law requires record, electronic records OK if
  accurate and accessible may be done by service
  provider
• Records of checks must contain information on
  front and back of check
• Electronic records are admissible in evidence
• Effect - written records may be discarded
• Governmental agencies may specify additional
  requirements

18
Sending and Receipt - Sec. 311

• Sent - addressed as designated by recipient, is
  capable of being processed and has entered system
  outside senders control
• Received - enters recipients system and is
  capable of being processed no requirement for
  individual to be aware of receipt
• Place of Contract Formation - deemed sent from
  sender place of business, and received at
  recipient place of business (or residence) - not
  system location
• Knowledge - if person aware of failure, legal
  effect determined by other applicable law -
  non-waivable

19
Transferable Records - Sec. 312

• Covers electronic negotiable notes (other than
  checks), warehouse receipts, bills of lading,
  documents of title under UCC
• Transferable record must be single authoritative
  unique copy, identifiable and unalterable person
  controlling is holder
• Delivery, possession and endorsement not required

20
Government Transactions - Ch. 5

• Use of electronic records and signatures left in
  discretion of each agency
• Effect - each governmental entity given option to
  determine extent to which it will use e-commerce
• Executive agencies of PA must comply with
  Governors Office of Admin standards
• Commonwealth Procurement Code authorizes
  electronic submission of bids and proposals

21
Consumer Transactions - Ch. 9

• Consumer primarily for personal, family or
  household purposes
• For non-electronic consumer agreements, Ch. 9
  requires consumer must separately agree to use of
  electronic means, manner of use, and must specify
  parts of transaction to be conducted
  electronically cannot be waived or inferred
• If party has actual knowledge that record not
  sent or received - then no legal effect (e.g.,
  e-mail notice bounces back)

22
Effect of Federal E-Sign Law

• Electronic Signatures in Global and National
  Commerce Act - signed 6/30/00
• Similar to UETA in validating legal effect of
  electronic signature or record, but is less
  comprehensive than UETA
• Preempts inconsistent state law, but does not
  preempt in states that have adopted official text
  of 1999 UETA, or have adopted another statute, or
  any regulation, that is
• consistent with E-Sign Titles I and II
• does not favor a specific technology
• if enacted after E-Sign, makes specific reference
  to E-Sign
• National businesses should comply with both laws
  - assume E-Sign controls

23
Exclusions from E-Sign Law

• E-Sign does not apply to
• wholly intrastate contracts
• wills, codicils or testamentary trusts, or
  contracts regarding adoption, divorce or family
  law
• UCC other than 1-107, 1-206, Articles 2 and 2A
• documents relating to foreclosure, eviction, and
  repossession of primary residence
• notices regarding termination of health insurance
  or life insurance
• notices of product recalls, health or safety risks

24
Shrink Wrap Contracts

• ProCD Inc. v. Zeidenberg -- knowledge of terms
  after purchase but before use OK, where right of
  return notice of unspecified additional terms
  before purchase
• M.A. Mortenson v. Timberline -- customer did not
  install knowledge of terms imputed from past use
  of earlier versions of software sufficient to
  provide notice
• Hill v. Gateway Brower v. Gateway -- knowledge
  of terms after opening box, but with 30 day right
  of return, OK contra - Klocek v,. Gateway --
  contract formed at time of order, not receipt of
  box and terms
• Contract as consent v. contract as product
• Viral contract -- terms run with product

25
Click Wrap Contracts

• Forrest v. Verizon (D.C. App. Ct. 2002) --
  Virginia forum selection clause in Verizon
  click-wrap DSL service agreement enforced
  plaintiff being forced to litigate in VA (as D.C.
  resident), and loss of right to file class action
  under VA law did not make clause unreasonable
• Comb v. PayPal (N.D. Cal. 2002) -- PayPal
  arbitration clause and forum selection clause in
  click-wrap agreement found substantively
  unconscionable under CA law because (1) could be
  amended without notice (2) forced arbitration
  under costly AAA rules (3) national users forced
  to arbitrate in CA (4) PayPal could hold
  customer funds until dispute resolved and (5)
  requires users to forego class action relief.
  Taken together, this allowed PayPal "to insulate
  itself contractually from any meaningful
  challenge to its alleged practices"

26
Browse Wrap Contracts

• Implied contract or conditional gift analysis
• Register.com v. Verio (2000) -- posted terms
  specified that use of database indicated assent
  to terms prohibiting copying and distribution
  Verio used software robot to extract information
  - held that robot query coupled with knowledge of
  terms bound Verio to terms (note no I Agree
  button)
• Specht v. Netscape (affd 2002) -- posted
  downloadable software license terms held not to
  apply because link to terms not conspicuous, no
  I Agree button please review and agree
  language at click for download just invitation
  and not precondition to use

27
Practice Pointers - See list in materials

• Terms in plain English, copyable and printable
  record of dates and changes in terms
• Clear reference to terms on product, in
  advertising, and at download
• Use I Agree / I Do Not Agree click online and
  upon use separate assent or highlight unusual
  terms no access until user has accepted terms
  keep record (user acct log)
• Assent to electronic contract opportunity to
  correct errors for online orders clear privacy
  policy (relate to offline)
• Provide for return and refund where purchase made
  before terms can be reviewed and accepted

28
Web Site Posted Terms of Use

• See Ticketmaster v. Tickets.com -- prohibition in
  posted terms against deep linking not enforced
• Clear reference to terms and access from all
  pages
• Use I Agree / I Do Not Agree click where
  significant liability exposure or valuable
  material involved
• No liability for implied warranties of
  merchantability or fitness for particular
  purpose consequential damages interruption or
  inaccessibility material provided by others or
  through linked sites
• Establish rules on postings - chat rooms, forums
  and bulletin boards

29
Global Contracting Issues

• Advice from local counsel make sure choice of
  law, jurisdiction and venue selection clauses are
  enforceable
• Disclaim Convention on International Sales of
  Goods (BtoB only)
• Dispute resolution issues arbitration generally
  is best
• Laws differ - e.g., French language requirements
  in Quebec termination rights, consumer rights,
  etc.
• Currency and foreign exchange issues on pricing
  tax collection and assessment issues
• Export restrictions
• Privacy rules - e.g., EU Directive on Data
  Protection

30
Virtual Goods

• Consumer given right to use digital resource,
  such as music, video game resources, graphic or
  animation, e-book
• Format issues enabling software or hardware
  (device specific) tie-in to goods in real world
• Control access to resource (e.g., PIN no.) and
  restriction on copying or distribution or use on
  multiple devices (Digital Rights Management -
  DRM)
• License restrictions on use detection of
  wrongful use
• Ability to obtain and use customer info for
  marketing
• Special problems with warranties, right to return
  goods, validation of delivery and receipt,
  taxation categories