Current Issues in Electronic Contracting

Current Issues in Electronic Contracting

Stephen M. FoxmanPhiladelphia

PBI - December 2, 2005

E-Commerce: Legal and Practical Issues

Applicable Contract LawApplicable 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

E-Sign, UCITA and State LawsE-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

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

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)

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.

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

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

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

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)

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)

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...

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

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)

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

Authentication and Digital SignaturesAuthentication 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

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

Sending and Receipt - Sec. 311

Sent - addressed as designated by recipient, is capable of being processed and has entered system outside sender’s control

Received - enters recipient’s 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

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

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 Governor’s Office of Admin standards

Commonwealth Procurement Code authorizes electronic submission of bids and proposals

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)

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

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

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

Click Wrap ContractsClick 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"

Browse Wrap Contracts

Implied contract or conditional gift analysisRegister.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 (aff’d 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

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

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

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

Virtual GoodsVirtual 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