Doing Business in a Click The Keys to Effective Electronic Credit Applications

2. Doing Business in a ClickThe Keys to Effective Electronic Credit Applications Presented by: Tracy Galimore Andrews Myers, PC Houston, Texas

3. Current Issues in E-Credit(What this Presentation IS) Tips on how to make your agreement stick in just a few clicks Businesses engaged in electronic commerce need assurance that terms important to their business are indeed binding and enforceable

4. What this Presentation is NOT • An instruction in how to set up an E-Credit Application… or any technical instruction at all. • Necessarily applicable to international commerce … That is a whole other ball game. • Legal Advice – you should always seek advice from a qualified attorney licensed to practice law in the jurisdiction in which you conduct business.

5. A little Background • We rely on an economic system based on contracts • We are rapidly become more and more dependent on electronic communication, commerce • As a result, Credit Professionals need to be sure their electronic contracts are legally valid and enforceable

6. A little Background Basic Concept of a Contract • Common understanding: • A legally binding agreement between two or more parties • What is required to form a contract? • OFFER (by you, the seller) • ACCEPTANCE (by the customer, the buyer) • Agreement on all material terms – “ASSENT” • Consideration

7. A little Background • What terms are required? • Clear description of the parties • Clear description of the liabilities • Signature* *Oral contracts are enforceable in many instances, but it is best to have a signature

8. A little Background ALL CONTRACTS ARE NOT CREATED EQUAL • B2B v. B2C • These contracts may be interpreted by Courts differently because of bargaining power, sophistication, etc. • Additional requirements for e-signatures to be valid in B2C transactions • Seller must give User right to receive paper copy • Seller must inform User of the duration of the agreement • Seller must notify User of procedure for withdrawing agreement

9. A little Background • Who/What governs the internet and electronic transactions? • No one • There is no single governing body • But, courts can rule on disputes if the Defendant has contacts with that state sufficient to satisfy the U.S. Constitution (“Due Process”)

10. How to Make the e-Credit Agreement Stick in Just a Few Clicks Obstacles to e-Contracts • Credit Application AND Agreement • Often no face to face meeting • Difficult to ensure both parties agree on all terms • Identifying the other party • More instances of fraud • Validity of e-Signatures • AKA Digital Signature • Electronic copy – pasting a scanned version • Typing the signer’s name into an area • Clicking “I Agree” • Cryptographic “scrambling” technology/PKI

11. How to Make the e-Credit Agreement Stick in Just a Few Clicks • E-SIGN • Electronic Signatures in a Global & National Commerce Act 15 USCA § §7001-7006 • Enacted by Congress on 6/30/00, Effective 10/1/00 • Applies to interstate (not exclusively within the state) commerce only

12. How to Make the e-Credit Agreement Stick in Just a Few Clicks • E-SIGN • Made electronic transactions and signatures have the same legal standing as conventional paper ones • Defies e-signatures broadly: “any electronic sound, symbol or process logically associated with a contract or other records and adopted by a person with the intent to sign”

13. How to Make the e-Credit Agreement Stick in Just a Few Clicks • UETA – Uniform Electronic Transactions Act • State version of E-SIGN – States were urged in E-SIGN to adopt UETA • Applies to intra-state commerce (within the state) • Adopted by 47 states, Puerto Rico, US Virgin Islands • Washington, Illinois and New York have not adopted the proposed version

14. How to Make the e-Credit Agreement Stick in Just a Few Clicks • UETA – Uniform Electronic Transactions Act • Governs only transactions for purchase of goods, not services or computer information • Whether a party has consented to do business electronically is determined by viewing the circumstances surrounding the transaction – including context and conduct of parties

15. How to Make the e-Credit Agreement Stick in Just a Few Clicks • What Contracts MUST be in PAPER? • Notices of Cancellation/Termination of Utility Services or Health or Life Insurance Benefits; • Notices of Default, Eviction, Repossession, Foreclosure, or right to cure under credit agreement secured by primary residence of individual; • Product recall notices affecting health or safety; and • Documents required by law to accompany the transportation of hazardous materials.

16. How to Make the e-Credit Agreement Stick in Just a Few Clicks • REMEMBER • These laws do not validate transactions that otherwise do not comply with statutory requirements • These laws do not require a Court enforce an e-Contract, but Courts may not discriminate against these transactions only because they are electronic • The goal of the statutes is to ensure nothing impedes further development, innovation

17. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Three Primary Types of e-Contracts • Shrinkwrap • Buy now & Agree to terms later • Used by computer, software and gaming manufacturers • Decline by returning the product • User can also assent by continuing to use a website • Browsewrap • No affirmative assent – Difficult to enforce • T&C are presented on the page – viewer may read if it chooses • User is bound by proceeding onto/into the website • Clickwrap • User asked to read T&C governing the site and agree to T&C before making purchase, obtaining service • Click the Box - “I agree”

18. Clickwrap • “Click Through Agreement” or “Clickwrap” • User agrees to transaction, terms without specifically signing name • Proposed electronic form agreement set up by one party so another contracting party may assent to the terms by clicking various icons or buttons • Customer reads the terms on the screen and makes choices related to the contracting process • Need to ensure the customer clearly and expressly manifests assent to the stated terms in order to be a binding contract

19. Clickwrap • “Clickwrap” • Is attributable to the person who clicked, subject to proof it was that person’s authorized act • Court will look to circumstances, including course of dealing/performance between the parties, usage of trade • Case law and legal commentary on these agreements is still fairly sparse, but these tips should provide guidance for many jurisdictions

20. How to Make the e-Credit Agreement Stick in Just a Few Clicks • NOTE: You may have a binding contract without following these tips, but utilizing these concepts will provide greater assurance your contract will be enforceable

21. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Viewing the Terms before Assent • Make sure your customer views the terms before they assent • The customer should not have the option of agreeing without having been presented the terms • Give customer a chance to print the terms and conditions • Include a statement that the parties are agreeing to conduct the transactions electronically

22. How to Make the e-Credit Agreement Stick in Just a Few Clicks KEYS for ASSENT • You want your user to agree or “click” before or during consummation of the transaction • Your user should be able to see the terms and conditions before assenting to the agreement

23. UETA Section 9 • An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable. (b) The effect of an electronic record or electronic signature attributed to a person under subsection (a) is determined from the context and surrounding circumstances at the time of its creation, execution, or adoption, including the parties' agreement, if any, and otherwise as provided by law

24. UETA Section 9 • In each of the following cases, both the electronic record and electronic signature would be attributable to a person under UETA: • The person types his/her name as part of an e-mail purchase order; • The person’s employee, pursuant to authority, types the person’s name as part of an e-mail purchase order; or • The person’s computer, programmed to order goods upon receipt of inventory information within particular parameters, issues a purchase order which includes the person's name, or other identifying information, as part of the order. • In each of the above cases, law other UETA would ascribe both the signature and the action to the person if done in a paper medium. Subsection (a) expressly provides that the same result will occur when an electronic medium is used.

25. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Acceptance or Rejection of Terms • The Customer should be given a chance to accept OR reject the terms • Words of assent should be clear and unambiguous • Not “Next” or “Continue” or “Submit”

26. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Acceptance or Rejection of Terms • User performed action that he/she was “free to refuse to perform” and which he/she knows will cause the electronic agent to complete the transaction* • By clicking “I AGREE”, User enables machine to close the deal and the User has entered into a contract according to the T&C to which he/she assented (assuming the T&C are otherwise enforceable)* *UETA §14(2),(3)

27. How to Make the e-Credit Agreement Stick in Just a Few Clicks What if the Customer Rejects the terms? • If the Customer rejects the proposed agreement terms, that action should have the consequence of preventing them from submitting their application • The Customer should not be permitted to complete the transaction without agreeing to the terms

28. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Just before acceptance or rejection, draw the customer’s attention to the consequences of assent or rejection • “By clicking ‘Yes’ below, you acknowledge you have read, understand and agree to be bound by the terms and conditions above” OR • “These terms are a legal contract that will bind both Customer and Seller as soon as you click the ‘Agree’ button.”

29. How to Make the e-Credit Agreement Stick in Just a Few Clicks • Just before acceptance or rejection, draw the customer’s attention to the consequences of assent or rejection • “If you reject the Terms and Conditions above, your request for a credit account with Seller will be denied.”

30. Issues to Consider in the T&C • 4 Important Conditions* (a) User has adequate notice of the proposed terms; (b) User has meaningful opportunity to review the terms; (c) User provided with adequate notice that taking a specific action manifests assent to the terms; and (d) User takes the action specified in (c) *Kunz, Ottaviani, Moringiello, Porter, Debrow (2003) “Browse-wrap agreements: validity of implied assent in electronic form agreements”, Business Law 59, 279.

31. Issues to Consider in the T&C • Forum Selection • Where will the dispute be adjudicated • A Texas Court in 2001, D.C. Court in 2002 each held that where a user had an opportunity to scroll past the forum selection clause, he had ample opportunity to read and understand the provision* • *Barnett v. Network Solutions, Inc., 38 S.W.3d 200 (Tex. App. – Eastland 2001); Forrest v. Verizon Communications, Inc.

32. Issues to Consider in the T&C • Alternative Dispute Resolution • Lawsuit or arbitration? • Mediation required first? • Even on a Click-Wrap, a Court may still deem the T&C invalid and unenforceable* *Comb v. PayPal, Inc., 218 F.Supp.2d 1165 (N.D. California 2002).

33. Dispute Resolution • Internet Users had agreed to a licensing agreement requiring arbitration (In re RealNetworks, Inc. Privacy Litigation, 2000 WL 631341 (ND Ill.) • While under the Fed. Arbitration Act, agreement to arbitration in “writing” does not have to be in paper, but an email announcement regarding new employment policy requiring arbitration was not sufficient to put the employees on notice (Campbell v. General Dynamics Gov’t Sys. Corp., 407 F.3d 546 (1st Circuit 2005)).

34. Other Helpful Hints…Not Necessarily e-Related • CREDIT APPLICATION AND AGREEMENT • Corporate status of applicant • LLC, Corp., DBA? • Date, state of organization, Fed. Tax ID • Owners/Officers and Directors & Contact Info • Credit References, History • Unlawful to Discriminate based on: race, color, religion, martial status, nat’l origin, age (Fed. Equal Credit Opp. Act extends to business credit)

35. Other Helpful Hints…Not Necessarily e-Related Merger Clause • “No terms or conditions of any purchase orders, agreements or any other documents, which are different to terms hereof, shall become part of any sales or credit agreement unless specifically provided by Seller in writing”

36. Other Helpful Hints…Not Necessarily e-Related Authority • “I declare under penalty of perjury that I am authorized to commit applicant to indebtedness and have carefully read the foregoing and understand same.” • “I represent the above information is true, correct and complete to the best of my knowledge and understand it will be used for the purpose of obtaining credit from Seller. I am authorized to, and do hereby bind my firm in accordance with the attached Terms and Conditions of sale.”

37. Other Helpful Hints…Not Necessarily e-Related Non-Waiver • “Any waiver by Seller of a breach of any provision of this Agreement shall be for that particular instance only, and shall not operate or be construed as a waiver of any subsequent breach hereof”

38. Questions? Presented by: Tracy Galimore Andrews Myers, PC Houston, Texas 713.850.4200 tgalimore@andrewsmyers.com