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Current Issues in Electronic Contracting. E-Commerce: Legal and Practical Issues. Stephen M. Foxman Philadelphia PBI - December 2, 2005. Applicable Contract Law. UCC - Sale of Goods 2-204 - Formation in General - covers electronic contracts e-mail contracts; statute of frauds issues

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Current Issues in Electronic Contracting

E-Commerce: Legal and Practical Issues

Stephen M. Foxman


PBI - December 2, 2005

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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

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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

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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

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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)

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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.

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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

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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

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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

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  • 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)

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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)

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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...

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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

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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)

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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    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"

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    Browse Wrap Contracts

    • Implied contract or conditional gift analysis

      • 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

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    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

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    Web Site Posted Terms of Use

    • See Ticketmaster v. -- 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

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    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

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    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