Lecture 9:Commercial Transactions Mary Jo Dively, Vice President and General CounselCarnegie Mellon University

Whats a Commercial Transaction?Sales ContractsGenerally for goods (toasters, cars, etc.)License ContractsGenerally for intangibles (software, electronic media, etc.)Banking TransactionsNegotiable instruments (checks, promissory notes, letters of credit, warehouse receipts, bills of lading)

Sales vs. LicensesSales:Buyer receives title to goodsLittle or no continuing relationship between buyer and sellerTerms of transaction flow from these principlesdelivery, performance, remediesLicenses:Licensee receives bundle of rights as specified in license contract; usually right to use along with other specified rightsTitle does NOT passContinuing Relationship between Licensor and Licensee

Uniform Commercial CodePrincipal commercial law in the US for past 50 years; codified then existing case lawEnacted by each STATE; variances among the statesSeparate Articles address different types of contracts (for example, Article 2 covers Sales of Goods, Article 9 covers Secured Transactions)

UCC Article 2Covers sales of goods; current draft excludes pure information contractsSets up a basic framework for how to create an enforceable contractOverriding Principle: Freedom of ContractDefault 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 AcceptanceA 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 (2-204)Enforceable forms: Writing, Oral, Conduct (all with varying requirements)

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

Is UCC Article 2 Sufficient for Information Products?Information Products manufactured and distributed differently than mass marketed goods: License v. saleArticle 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 judgesResponsible for sophisticated uniform legislationUCC Article 2 for exampleDrafting ProcessStates individually consider each uniform law

My RoleActed as an ABA Advisor to the UCITA Drafting Committee; attended every meeting of the DCChaired the ABA committee that served as research resource for UCITA and UETA Drafting CommitteesAlso 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 UCITARecently appointed a NCCUSL Commissioner for Pennsylvania

The Uniform Electronic Transactions ActState 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 signatureswithout changing substantive rules of lawan 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 signature.

UETA: Basic RulesA 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, continuedThe rest of UETAs rules serve these four basic rules, and attempt to answer basic legal questions about the use of electronic records and signatures Parties must agree to conduct business electronicallyno one can be forced to do soDeliveryAttribution

UETA: Sending Electronic Recordsan 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 RecordsThe 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 recordsA 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 ActA uniform statute designed to codify current law and practice in contracts for computer informationScope is limited to transactions in Computer Information NOT intended to answer every specific question, but to provide a structure for courts to analyze questionsSpecial rules for mixed transactions

EnactmentsUCITA 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

EnactmentsUCITA 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 InformationAn 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 transactionsagreements related to the creation, performance etc. of movies and sound recordingsemployment contractstransactions where computer information is de minimis

Special Rules for Mixed Transactions with GoodsCI + Goods: UCITA applies to the CI, not the Goods; Article 2 applies to the goodsBUT, 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 RulesAllows contracts to be made computer to computer, or human to computerUpdates 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 contracts

Section 105: Breaking Ground4 Important Provisions:Federal Law PreemptsTerms Cannot Violate Public PolicyTerms which prohibit lawful public comment are bannedUCITA does not apply to IP noticesimportant provision for free software

Fundamental Public Policy RulesTerms or Records which violate fundamental public policy of a state are unenforceableExamples: Innovation, competition, fair comment, fair useComments provide guidance for courts on how to apply 105

Fair CommentCopy of CI in final form made generally availableProhibits clauses which prohibit otherwise lawful public commentSubject to other laws which legitimately support confidentialityi.e. trade secrets, non-disclosure, etc.

The Rules on Shrinkwrap ContractsHas been a controversial topicMany alternatives consideredThe 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 licensee.

Clickwrap ContractsFormation Rules are the same as Shrinkwraps--licensee must have opportunity to review terms before manifesting assentSafe 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 ForumVery important in cyberspace, where you might not know where the other party is, or they might be lyingFollows existing common lawChoices of law are enforceable, but special protections for consumersChoices of forum are enforceable as long as not unreasonable and unjust

WarrantiesUCITA creates statutory implied warranties, for first time, in information transactionsWarranties created: Noninterference and NoninfringementMerchantability of computer programInformational ContentFitness for licensees purpose, system integration

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

Key Changes in Response to ABAUCITA now expressly forbids clauses in licenses which prohibit most reverse engineeringUCITA now expressly forbids clauses in licenses which prohibit public comment about the performance of softwareUCITA now expressly bans the use of electronic self help in all casesThe default rules on number of users and duration of license have been deleted

UCITAs futureUnclear at this timeCourts continue to express need for a law to govern information contracting, and to validate key UCITA approachesIf 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 ThoughtsThe 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 constituenciesMeanwhile, new concerns on the horizon:Digital Rights ManagementAnti-circumvention lawsProtection for libraries

Q & A?