Ladas & Parry - Domain Names & E-Commerce - Overview of U.S. Laws Relating to E-Commerce

Domain Names & E-Commerce / E-Commerce / Overview of U.S. Laws Relating to E-Commerce

2. Contract Formation

Currently, there is no legislation in force in the United States which mandates disclosure of certain information in business-to-business or business-to-consumer transactions specifically governing online transactions. While the Internet may be revolutionizing the way many companies conduct business, the rules in e-commerce transactions follow, for the most part, the rules set forth in traditional, paper-based transactions. For example, to be enforceable, certain contracts must be signed by the party to be bound and the elements of offer, acceptance and consideration must exist.

2.1 Requirements for Writing and Signature in the Electronic Age

In July, 1999, the National Conference of Commissioners on Uniform State Laws (hereinafter NCCUSL) gave final approval to the Uniform Electronic Transactions Act (UETA) and offered this as a model law for enactment by the states to cover contracts governed by state law. The UETA was drafted with the purpose of facilitating electronic commerce by establishing that electronic transactions should have the full force and effect of traditional paper transactions. The UETA was drafted to complement and not supersede existing state law. On June 30, 2000, President Clinton signed into law the Federal Electronic Signatures on Global and National Commerce Act, colloquially referred to as "E-Sign". Prior to the adoption of the UETA as a model law and the enactment of the Federal law, several states had enacted laws relating to electronic signatures. Some had been of general application, while some were restricted to the use of electronic signatures in certain situations only.

One other issue that arose with prior state laws was that some state laws were restricted only to certain types of electronic signatures (commonly referred to as "digital signatures"). These latter laws typically required some form of encryption to make the signature valid, commonly a combination of public key and private key and in some cases tended to be dependent on particular technology. The Federal law and UETA are not dependent on any particular type of technology and the preemption provisions in the Federal law will, in due course, require that for interstate and international commerce, a technology neutral system will prevail. The main provisions of UETA and E-Sign are set out below. There are, however, differences between them that should be noted. These include: more consumer consent provisions in the Federal law than in UETA and the omission from the Federal law of provisions relating to the attribution and deemed timing of electronic signature which appear in UETA.

2.1.1 The Uniform Electronic Transactions Act (a Model for State Laws)

The UETA applies to transactions in which each party has agreed to conduct the transaction by electronic means and supplements existing substantive state law. Its main provisions are as follows:

Section 7:
a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form;
b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation;
c) If a law requires a record to be in writing, an electronic record satisfies the law;
d) If a law requires a signature, an electronic signature satisfies the law.

Section 9:
a) 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 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.

Section 14:
a) A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agent's actions or the resulting terms or agreements;
b) A contract may be formed by the interaction of an electronic agent and an individual, acting on the individual's own behalf or for another person, including by an interaction in which the individual performs actions that the individual is free to refuse to perform and which the individual knows or has reason to know will cause the electronic agent to complete the transaction or performance.

An "electronic signature" is defined as "an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with intent to sign the record.

2.1.2 State Laws

Several states have already passed legislation relating to digital or electronic signatures. For example, California enacted a Uniform Electronic Transactions Act on September 16, 1999 based on the model law and has also passed a specific law relating to use of digital signatures in brokerage contracts. [6] In New York, the General Obligations Law Section 5-701 which requires certain contracts to be in writing has been amended to provide that "the tangible written text produced by telex, telefacsimile, computer retrieval or other process by which electronic signals are transmitted by telephone or otherwise shall constitute a writing and any symbol executed or adopted by a party with the present intention to authenticate a writing shall constitute a signing." [7]

States which have adopted the UETA in substantially the same form as the model law include Idaho, Indiana, Kentucky, Minnesota, Nebraska, Pennsylvania, South Dakota, Utah and Virginia.

2.1.3 The Federal Electronic Signatures on Global and National Commerce Act

The new federal law will, for the most part, come into effect on October 1, 2000. Its major provisions are set out below. [8]

So far as any transaction in or affecting interstate or foreign commerce is concerned, a signature, contract or other record may not be denied legal effect, validity or enforceability solely because it is in electronic form. [9] Furthermore, a contract relating to such a transaction may not be denied legal effect, validity or enforceability solely because an electronic signature or record was used in its formation. An electronic signature is defined as being:

An electronic sound, symbol or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."

An electronic record is defined as being:

A contract or other record created, generated, sent, communicated, received, or stored by electronic means.

The statute does not, however, affect any other statute or rule of law that applies to such transactions. Nor does it permit anyone required by law to make information available to consumers in writing, to supply such information in electronic form, unless the consumer has consented to the supply of the information in electronic form after being given information about this possibility and what is required to receive the information in electronic form.

The statute also provides that a contract or other record relating to a transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity or enforceability solely because its formation, creation or delivery involved the action of one or more electronic agents, so long as the action of any such electronic agent is legally attributable to the person to be bound.

Provision is made for a limited exemption to federal preemption of state law so that a state law may modify, limit or supersede the above provisions if, subject to certain exceptions, that law is an enactment of UETA discussed above or if certain other specified circumstances apply. The question of whether the Federal statute preempts states digital signature legislation has been the subject of some debate among the cognoscenti and awaits some case law to resolve the issue. The Act does, however, clearly preempt any state law requiring contracts or signatures to be in non-electronic form.

2.2 Contract Formation by Shrink-wrap and Click-wrap Agreements

Questions arise as to the effect and enforceability of shrink-wrap and click-wrap agreements. The former are typically agreements printed on a box in which software is sold and the opening of the box, the use of the software or the failure to return the product to the point of sale is deemed to constitute acceptance of the terms set out. [10] The latter are terms set out on a web page or something similar in which the other party is requested to indicate acceptance of the terms set out by clicking on a box on the screen. Shrink-wrap licenses have met with varying reactions by the courts. [11] In any case, it is clear that such contracts can be regarded as contracts of adhesion. In principle, there is nothing wrong with such contracts. However, the courts have a tendency to look at such contracts more strictly than those that have been freely bargained for when it comes to application of rules relating to unconscionability. Section 2-302 provides that courts may decide not to enforce any contract or clause in a contract that is found "to have been unconscionable at the time it was made." [12]

The courts have had fewer problems with click-wrap licenses, although these again have some elements of a contract of adhesion since there is no scope for individual bargaining. Click-wrap agreements are often included in software downloads and are present on many websites. They contain proprietary rights provisions which state that the information contained in the licensed software cannot be copied or disclosed without the licensor's permission [13] and prevent the licensee from selling or otherwise disposing of his/her copy of the software. [14] This may extend to further limit the licensee's right to decompile or disassemble the program for any reason, or to copy any part of the program. [15] By including these terms in "click-wrap" agreements, licensors can offer more protection for propriety information than is afforded under the Copyright Act and sometimes federal and international intellectual property laws. [16]

Unlike "shrink-wrap" agreements, [17] "click-wrap" agreements present the consumer with a choice. The consumer is free to read the terms of the license and decide whether he/she wants to abide by its terms. [18] Because "click-wrap" agreements are interactive, and demand a response from the consumer, they are enforced.

Because of the common use of "click-wrap" acceptances of offers in the field of the supply of information over the Internet, the Uniform Computer Information Transactions Act (UCITA which is discussed in more detail below) contains some specific provisions that are relevant. Click-wrap contracts are enforceable under the UCITA if three requirements are satisfied. First, the licensee must have reason to know that additional contract terms will be proposed after the initial agreement. [19] Second, the licensee must be given the right to return the product at the licensor's cost. Third, the licensee must be compensated for reasonable costs of restoring the system if it is altered by the installation of license terms for review. [20] The same standard of "manifesting assent" [21] applies as for all other licenses under UCITA.

Until UCITA is enacted, there are certain steps now that the on-line licensor can take in order to maximize the probability that a "click-wrap" licensing agreement will be enforced. First, the agreement should present the term of the license in a manner that will attract the licensee=s attention and it should also be made very clear to the licensee that he or she is required to read the license terms. [22] Second, the licensee should be required to affirmatively accept the license terms by clicking an "I Accept" or "I Agree" button and should also be given the option of rejecting the terms and canceling the software installation or download. [23] Third, the agreement should ask questions to ensure that the licensee has the authority and legal capacity to accept the agreement terms. [24] Finally, the licensee should not be permitted to install the software without accepting the license terms. [25]

[6] The California law is not identical with UETA by excluding transactions governed by other state laws and limiting the courts rights to infer agreement by conduct.

[7] New York General Obligations Law S 5-701b(4).

[8] There are, however, certain specific provisions relating to issues of wills, codicils, testamentary trusts, other features of family law, court orders, notices or documents, notices by utility services, termination or cancellation notices relating to health insurance or life insurance, recalls of dangerous products and documents relating to the handling of hazardous materials, pesticides or other toxic or dangerous materials.

[9] The term "transaction" is defined as being an action or set of actions relating to the conduct of business, consumer or commercial affairs between two or more persons.

[10] Creation of a contract by conduct is recognized by the UCC Article 2-204(1): "A contract for the sale of goods may be made in any manner sufficient to show agreement , including conduct by the parties which recognizes the existence of such a contract."

[11] See, for example, Step-Saver Data Systems Inc. v. Wyse Technology 939 F.2d 91 (3^rd Cir. 2001), Vault Corp v. Quaid Software Ltd 847 F.2d 255 (5^th Cir. 1988) and ProCD Inc v. Zeidenberg 86 F.3d 1447 (7^th Cir. 1996).

[12] The doctrine of unconcscionability is a basis by which a party to an otherwise enforceable sales agreement may avoid that agreement. Although UCC Article 2 does not include a definition of unconscionability, Official Comment 1 to 2-302 states:

The basic test is whether, in light of the commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.

In other words, the doctrine of unconscionability prevents oppression and unfair surprise while not disturbing the allocation of risks involved in bargaining.

[13] Zackary M. Harrison, "Just Click Here: Article 2B's Failure to Guarantee Adequate Manifestation of Assent in Click-Wrap Contracts," 8 Fordham Intell.Prop. Media & Ent. L.J. 907, 910 (1998); see also Thomas H. Watkins and Lisa O. Laky, Internet Issues for Lawyers, 547 PLI/Pat 899, 903 (1999).

[14] Schwab, Arthur J, Pamela A. McCallum and Meghan M. Tighe, Focus on E-Commerce, Glasser Legal Works Conference, New York City, November 4-5, 1999.

[15] Id. at 910-911.

[16] Id. at 909-911.

[17] These agreements, often shipped with computer software or hardware, are rarely enforced, Hillv. Gateway 2000, Inc., 105 F.3d 1147, 1148-50 (7^th Cir. 1997) (holding that computer company that included, in terms of sale shipped with computer, an arbitration clause, unless product was returned within 30 days was binding on the consumer), cert. denied, 118 S.Ct. 47 (1997); ProCD Inc. v. Zeidenberg, 86 F.3d 1447, 1450-55 (7^th Cir. 1996). Courts generally consider a "shrink-wrap" agreement to be a "contract of adhesion." since the buyer generally did not read it beforehand or bargain for its terms, see, e.g. Vault Corp. v. Quaid Software Ltd., 655 F.Supp. 750, 761 (E.D. La. 1987), aff'd, 847 F.2d 255 (5^th Cir. 1998); Foresight Resources Corp. v. Pfortmiller, 719 F.Supp. 1006, 1010 (D.Kan. 1989).

[18] Schwab, Arthur J, Pamela A. McCallum and Meghan M. Tighe, Focus on E-Commerce , Glasser Legal Works Conference, New York City, November 4-5, 1999.

[19] UCITA 208(2) (Oct. 15, 1999 Draft).

[20] UCITA 209(b).

[21] Restatement (Second) of Contracts 19 (1981) ("(1) The manifestation of assent may be made wholly or partly by written or spoken words or by failure to act. (2) The conduct of a party is not effective as a manifestation of his assent unless he... has reason to know that the other party may infer from his conduct that he assents. (3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause").

[22] Id.

[23] Id.

[24] Id.

[25] Id.

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