Current Issues in Electronic Contracting

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 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

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 Governor’s 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 (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

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