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L E C T R O N I C C O M M E R C
E : V E R S I O N 2.0
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Congratulations to the Fall 2001 class for an excellent semester.
eCommerce will return next year.
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eContracts I: The Evolution of Contract
Formation
R E A D I N G S
Introduction
The contract is the language of commercial exchange.
As such, contracts have existed as long as law itself has been used
to regulate activity. The contract has, if anything, become even more
important in the digital age, though there a number of issues that
have appeared in this transition to electronic contracting.
Margaret Jane Radin of Stanford Law School, a leading
scholar in this field, has usefully identified six critical issues
facing electronic contracts:
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Authentication: how do
we know who made this deal and what will count as a definitive
record of its terms?
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Binding commitment:
How will interactions between people and computers create binding
commitments?
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Standardization: Will
uniform standardized "adhesion" contracts be enforceable?
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Excluded terms: Under
what circumstances should particular terms in ecommerce deals
be disallowed?
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Viral contracts: To what
extent may distributors pass obligations on to everyone in a distribution
chain?
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Jurisdiction and choice of
law: Whatever the governing rules of choice of law and jurisdiction
would otherwise be, can they be routinely altered by contract?
Margaret Jane Radin, Retooling Contracts for the
Digital Era, Hoover Inst. (2000).
Radin's point is that electronic contracting presently
lacks a firm "legal infrastructure" that fully addresses the variety
of form and content made possible by new technology. Indeed, her six
problematics for contract might helpfully be placed into the context
of the pillars of contract law:
1. Challenges to contract formation: binding
commitment between humans and computers, or computers and computers;
the enforcement of uniform standard contracts.
2. Challenges to contract terms: terms excluded
for public policy reasons; the allowance of "viral" contract terms.
3. Challenges to contract enforcement: authentication
of deal-making; choice of law problems.
Note, of course, that these categorizations are not
without fuzziness -- the limitation of terms may arise because of
defects in formation, for example -- but are nonetheless useful for
purposes of ordering our inquiry into these issues.
In this section of the class, we'll investigate the
legal infrastructure of electronic contracting, reviewing the current
status of electronic contracts, as well as positing the direction
the law (and technology) might take in the future.
The Evolution of Contract Formation
In this part, we'll review the law of contract formation, as it applies
to eContracts.
Part 1: Shrinkwraps
A "shrinkwrap" contract is one that manifests assent
by the actions of one of the parties -- in the shrinkwrap context,
the breaking of the packaging surrounding a purchased item.
Read the following two cases:
ProCd
v Zidenberg, 86 F.3d 1447 (7th Cir. 1996). [pdf, 28 kb, edited]
Hill v Gateway,
105 F.3d 1147 (7th Cir. 1997) [pdf, 16 kb, edited]
Part 2: Clickwraps
ProCD, etc. deals with shrinkwrap contracts -- those
that use the opening of a package as a manifestation of assent to
terms contained therein. Close cousins to shrinkwraps,
"clickwraps" are used in the online context, using the clicking of
a button (or, at times, the mere use of a web site) as manifestations
of assent. They are often also referred to as "Terms of Service (TOS)"
or "Conditions of Use (COU)"
Example 1: eBay
When you register for eBay, you are required to "click-through"
the following agreement:
eBay,
Registration Agreement (2001) [ pdf, 32 Kb ]
[the
portion of the agreement in the text box can be found by clicking
here] [ pdf, 20 kb ]
Example 2: Disney.com [as suggested by Radin,
Humans, Computers & Binding Commitment, 75 Ind. L. J. at
1129]
The Disney.com home page, if you scroll down far enough, contains
the following link:
Use of this site signifies your agreement to
the terms of use. [click
here to review the terms of use]
Did you notice anything interesting about the
terms of use on either site? How would you analyze the contract
formation issues raised by these examples? When is the contract
formed? Are all terms included?
Clickwraps (at least some types) have an uncertain
status, as the following case indicates:
Specht v Netscape,
150 F. Supp. 2d 585 (SDNY 2001) [ pdf, 40 kb ].
Part 3: Beyond Shrinkwraps and Clickwraps
Machine-Made Contracts
We're looking here at a different sort of contract
-- one made by computers rather than with any direct participation
by human beings. Radin describes this as follows:
By machine-made contract, I am referring to a
loose category of transactions that are structured in the first
instance by machines, with the humans in the background at some
remove. Strictly speaking, it is a machine-implemented transactional
structure when I use my personal computer to click on a box on
my screen which then registers with a server computer somewhere
else. I am dubbing transactional structures (whether or not contractual
is a question to be answered) machine-made, however, only if the
human pushing the key is not so directly involved. Machine-made
contract in this sense falls into two broad categories: computers
as electronic "agents," and computers as electronic enforcers.
1. Electronic "Agents"
In this category of machine-made contract, the
idea is that two computers (rather than two humans, or one human
and one computer) "negotiate" with each other and arrive at "agreement"
with each other. Using the term "agency" in the locution "electronic
agency" has become common, so I am adopting the usage, but before
proceeding I want to register a caveat. The terms should seem
peculiar in this context. When a computer does something "for"
me that I have allowed it to be programmed to do, it is only an
"agent" in a mechanical sense; it carries out the instructions
of the program automatically so I will not have to do it manually.
The term "agent" means something else when we are considering
human "agency." Human "agency" refers to the freedom of autonomous
beings. Human "agency" figures prominently in the traditional
picture of contract-as-consent: it takes a human "agent" to be
able to give voluntary consent. The law of "agency," which developed
to cover situations in which one human delegated tasks to another,
perhaps partakes of both senses; but no "agent" in a "principal-agent"
relationship could be in the mechanized relationship that one
who causes a computer to run a program is with that computer's
activities. Use of the term "electronic agent" runs together these
meanings and may cause us not to see how the issue of consent
is being submerged or metamorphosed.
Right now, the computer-to-computer electronic
agent scenario is primarily being developed in industrial procurement
and general supply-chain management. In the generation following
Electronic Data Interchange ("EDI")-a set of protocols developed
in the 1980s for information sharing between trading partners-both
extranets and the Web are being used to couple the vast power
of digital automation with principles of just-in-time manufacture
and distribution. In this form of industrial organization, many
repetitive tasks are or will be accomplished by machine. Among
these tasks are ordering and paying for supplies that are routinely
needed at certain points in a process. The ordering, delivery,
and payment for such supplies means that there are contractual
terms surrounding the transaction-the time of delivery, what to
do if the supplies do not arrive in time or are defective, what
to do if the payment is late, and all the other transactional
parameters that people contract about. All of this can in principle
be handled primarily by machine, using computer programs that
"negotiate" with each other and enter into "agreements" with each
other.
Although automated supply-chain management is
in the vanguard of the form of machine-made contract I have (reluctantly)
designated electronic agency, in the near future these machine-made
contracts may well become very widespread. Electronic agents may
shop for us, organize our homes and offices for us, and so on.
2. Electronic Enforcers
In the second category of machine-made contract,
known as digital rights management systems or trusted systems,
computer programs enforce the terms of a transfer of digital content.
The system is "trusted" (more trustworthy than a human) because
it is technologically incapable of deviating from the instructions
it is given. Those instructions may be, for example, to enforce
a thirty-day license by erasing the content from the licensee's
machine when the thirty days are up; or to enforce a restriction
against copying either by preventing the copy from being made
or by erasing the content from the licensee's machine if copying
is attempted. Such detailed self-enforcement mechanisms will likely
be a significant aspect of the human/computer interface for electronic
commerce. They are viewed with alarm by some, but welcomed by
others whose vision of anarchic self-ordering in cyberspace includes
widespread technological self-enforcement.
Humans, Computers & Binding Commitment, 75
Ind. L. J. at 1130-31.
With respect to "trusted systems," review the following
article:
Mark Stefik, Trusted Systems, Scientific American, March
3, 1997
Viral or Unseen Contracts
A possible third type of contract seen in electronic
commerce is what Radin describes as a "viral" contract -- one whose
terms purport to run with an object regardless of whether the present
user has manifested assent to the terms:
Viral Contracts
The analogy of viral propagation has proved apt
for various aspects of information transfer in a networked digital
environment. Information can be rapidly replicated, and each replica
in turn can be rapidly replicated, and so on through a chain of
replication throughout the network. Most people are familiar with
computer viruses, which are destructive software programs that
are spread through successive replication in this way. But the
analogy holds more broadly. The economics of the networked environment
have engendered a phenomenon known as viral marketing. In this
form of marketing, the seller provides incentives for buyers to
obtain other customers, and for those customers in turn to obtain
other customers, and so on. Many commercial web sites have "affiliates"
programs designed to do this.
In the future, we should expect to see more and
more viral marketing. Instead of locking up intellectual property,
for example, many purveyors of content will be better off by allowing
their content to propagate freely, as soon as there is a viable
automatic payment mechanism than can cause payment to be extracted
from whoever downloads the content, wherever it goes. Moreover,
much content on the Web is (and more will be) free advertising
for follow-on services. The more this content propagates, the
better for its initiator, as long as technological safeguards
exist to maintain its integrity and keep the advertiser's name
on it.
In keeping with the viral character of content
propagation, a transactional phenomenon I call viral contract
is arising. A viral contract (or attempted viral contract, because
we do not know yet whether these attempts will result in an actual
contract) is simply an attempt to make commitments run with a
digital object. For example, in the viral advertising program
I described above, the advertiser who initiates the spread of
the content would like to make each and every user into whose
hands the content comes be obligated not to alter the content
or remove the advertiser's name from it. The initiator would like,
in other words, to attach the obligations regarding the content
to the content itself, so that everyone who comes into possession
of the content would also inherit the obligations to the initiator.
Viral contract attempts to make the fine print run with the product.
In a sense, it is the ultimate instantiation of the contract-as-product
model.
The clearest instance of attempted viral contract
today involves open source software. The Linux operating system,
which now has a nontrivial share of the market, is governed by
a version of the General Public License promulgated by Richard
Stallman and the Free Software Foundation, in conjunction with
a kernel developed by Linus Torvalds. The open source "movement"
is based on the idea that each recipient in a chain of distribution
is bound to make public (or make available to all those in the
chain) any improvements effected in the source code. The license
uses copyright to make copyright narrower (keeping in the public
domain what otherwise would have been property of the improvers).
Because of this narrowing effect, the license is known as "copyleft."
However, in what might be called "supercopyright," the same technique
can also be used to attempt to broaden copyright (or for that
matter other intellectual property entitlement schemes). An example
would be a "running" waiver of the fair use defense to copyright
infringement, in which a distributor seeks to foreclose that defense
for all users in a chain of distribution.
Software publishers have hitherto "licensed" rather
than sold copies of their software so that they could restrict
transfer, and so that they could maintain restrictions after a
sublicense was effected. Software publishers most likely would
prefer viral sales contracts with running obligations on all transferees
in a chain of distribution, and merely doubt their legal enforceability
(as well as whether transferees would accept such obligations
in the market). But if market forces bring the total restraint-on-alienation
model into disfavor, and changes in the law validate viral contracting,
we might see viral contracting become very commonplace.
Humans, Computers & Binding Commitment, 75
Ind. L. J. at 1132-33.
N O T E S & Q U E S T
I O N S
1. Although ProCD and Hill have become influential
in courts' treatment of shrinkwrap contract issues, there is some
confusion about the status of contract terms that are "agreed to"
by subsequent performance. In Klocek
v Gateway, 104 F. Supp. 2d 1332 (D. Kan. 2000), the court
noted the following:
The Uniform Commercial Code ("UCC") governs the
parties' transaction under both Kansas and Missouri law. See K.S.A.
§ 84-2-102; V.A.M.S. § 400.2-102 (UCC applies to "transactions in
goods."); Kansas Comment 1 (main thrust of Article 2 is limited
to sales); K.S.A. § 84-2-105(1) V.A.M.S. § 400.2-105(1) ("'Goods'
means all things . . . which are movable at the time of identification
to the contract for sale . . . ."). Regardless whether plaintiff
purchased the computer in person or placed an order and received
shipment of the computer, the parties agree that plaintiff paid
for and received a computer from Gateway. This conduct clearly demonstrates
a contract for the sale of a computer. See, e.g., Step-Saver Data
Sys., Inc. v. Wyse Techn., 939 F.2d 91, 98 (3d Cir. 1991). Thus
the issue is whether the contract of sale includes the Standard
Terms as part of the agreement.
State courts in Kansas and Missouri apparently have
not decided whether terms received with a product become part of
the parties' agreement. Authority from other courts is split. Compare
Step-Saver, 939 F.2d 91 (printed terms on computer software package
not part of agreement); [**14] Arizona Retail Sys., Inc. v. Software
Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (license agreement
shipped with computer software not part of agreement); and U.S.
Surgical Corp. v. Orris, Inc., 5 F. Supp. 2d 1201 (D. Kan. 1998)
(single use restriction on product package not binding agreement);
[*1338] with Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.),
cert. denied, 522 U.S. 808 (1997) (arbitration provision shipped
with computer binding on buyer); ProCD, Inc. v. Zeidenberg, 86 F.3d
1447 (7th Cir. 1996) (shrinkwrap license binding on buyer); and
M.A. Mortenson Co., Inc. v. Timberline Software Corp., 140 Wn.2d
568, 998 P.2d 305 (Wash. 2000) (following Hill and ProCD on license
agreement supplied with software). It appears that at least in part,
the cases turn on whether the court finds that the parties formed
their contract before or after the vendor communicated its terms
to the purchaser. Compare Step-Saver, 939 F.2d at 98 (parties' conduct
in shipping, receiving and paying for product demonstrates existence
of contract; box top license constitutes [**15] proposal for additional
terms under § 2-207 which requires express agreement by purchaser);
Arizona Retail, 831 F. Supp. at 765 (vendor entered into contract
by agreeing to ship goods, or at latest by shipping goods to buyer;
license agreement constitutes proposal to modify agreement under
§ 2-209 which requires express assent by buyer); and Orris, 5 F.
Supp. 2d at 1206 (sales contract concluded when vendor received
consumer orders; single-use language on product's label was proposed
modification under § 2-209 which requires express assent by purchaser);
with ProCD, 86 F.3d at 1452 (under § 2-204 vendor, as master of
offer, may propose limitations on kind of conduct that constitutes
acceptance; § 2-207 does not apply in case with only one form);
Hill, 105 F.3d at 1148-49 (same); and Mortenson, 998 P.2d at 311-314
(where vendor and purchaser utilized license agreement in prior
course of dealing, shrinkwrap license agreement constituted issue
of contract formation under § 2-204, not contract alteration under
§ 2-207).
Is the distinction based on "when" the contract was
formed useful? When do you think the contract was "formed" in ProCD?
2. The Klocek court also noted that ProCD
holds that UCC 2-207 is not relevant when only one form -- the vendor's
-- is at issue. Instead, ProCD holds that UCC 2-204 is the
relevant section.
§ 2-204. Formation in General.
(1) A contract for sale of goods may be made in
any manner sufficient to show agreement, including conduct by both
parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract
for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open
a contract for sale does not fail for indefiniteness if the parties
have intended to make a contract and there is a reasonably certain
basis for giving an appropriate remedy.
* * *
§ 2-207. Additional Terms in Acceptance or
Confirmation.
(1) A definite and seasonable expression of acceptance
or a written confirmation which is sent within a reasonable time
operates as an acceptance even though it states terms additional
to or different from those offered or agreed upon, unless acceptance
is expressly made conditional on assent to the additional or different
terms.
(2) The additional terms are to be construed as
proposals for addition to the contract. Between merchants such terms
become part of the contract unless:
(a) the offer expressly limits acceptance to the
terms of the offer; (b) they materially alter it; or (c) notification
of objection to them has already been given or is given within
a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the
existence of a contract is sufficient to establish a contract for
sale although the writings of the parties do not otherwise establish
a contract. In such case the terms of the particular contract consist
of those terms on which the writings of the parties agree, together
with any supplementary terms incorporated under any other provisions
of this Act.
Is ProCD correct that 2-207 is inapplicable?
Note that the Official Notes to 2-207 state the following:
This section is intended to deal with two typical
situations. The one is the written confirmation, where an agreement
has been reached either orally or by informal correspondence between
the parties and is followed by one or both of the parties sending
formal memoranda embodying the terms so far as agreed upon and adding
terms not discussed. The other situation is offer and acceptance,
in which a wire or letter expressed and intended as an acceptance
or the closing of an agreement adds further minor suggestions or
proposals such as "ship by Tuesday," "rush," "ship draft against
bill of lading inspection allowed," or the like. A frequent example
of the second situation is the exchange of printed purchase order
and acceptance (sometimes called "acknowledgment") forms. Because
the forms are oriented to the thinking of the respective drafting
parties, the terms contained in them often do not correspond. Often
the seller's form contains terms different from or additional to
those set forth in the buyer's form. Nevertheless, the parties proceed
with the transaction.
3. ProCd holds that, under the UCC (specifically
2-204): "A vendor, as master of the offer, may invite acceptance by
conduct, and may propose limitations on the kind of conduct that constitutes
acceptance. A buyer may accept by performing the acts the vendor proposes
to treat as acceptance" What do you think of this statement? Note
that, as at least one court has noted,
the Seventh Circuit provided no explanation for
its conclusion that "the vendor is the master of the offer." See
ProCD, 86 F.3d at 1452 (citing nothing in support of proposition);
Hill, 105 F.3d at 1149 (citing ProCD). In typical consumer transactions,
the purchaser is the offeror, and the vendor is the offeree. See
Brown Mach., Div. of John Brown, Inc. v. Hercules, Inc., 770 S.W.2d
416, 419 (Mo. App. 1989) (as general rule orders are considered
offers to purchase); Rich Prods. Corp. v. Kemutec Inc., 66 F. Supp.
2d 937, 956 (E.D. Wis. 1999) (generally price quotation is invitation
to make offer and purchase order is offer). While it is possible
for the vendor to be the offeror, see Brown Machine, 770 S.W.2d
at 419 (price quote can amount to offer if it reasonably appears
from quote that assent to quote is all that is needed to ripen offer
into contract), [plaintiff/vendor] provides no factual evidence
which would support such a finding in this case.
Klocek
v Gateway, 104 F. Supp. 2d 1332 (D. Kan. 2000),
4. Even aside from any doctrinal or technical problems
in ProCD and its progney, ProCD does embody a distinct
view of contract. To this end, Margaret Jane Radin has made the following
distinction between contract-as-consent and contract-as-product:
Contract-as-Consent and Contract-as Product
. . . I will distinguish between two views or models
of contract. Call one model "contract-as-consent"; call the other
model "contract-as- product." Contract-as-consent is the dominant
view in ordinary discourse; contract- as-product is submerged in
that discourse (except among some economists) but aptly describes
much of transactional practice.
The contract-as-consent model is the traditional
picture of how binding commitment is arrived at between two humans.
It involves a meeting of the minds between two humans, or at least
voluntariness, or at least consent. These terms are both fuzzy and
contested; the traditional picture is out of focus. At minimum,
consent involves a knowing understanding of what one is doing in
a context in which it is actually possible for one to do otherwise,
and an affirmative action in doing something, rather than a merely
passive acquiescence in accepting something. These indicia translate
into requirements that terms be understood, that alternatives be
available, and probably that bargaining be possible.
The contract-as-product model is the typical model
assumed by economists. In this model, the terms are part of the
product, not a conceptually separate bargain; physical product plus
terms are a package deal. The fact that a chip inside an electronics
item will wear out after a year is no less and no more a feature
of the item and its quality than the fact that the terms that come
with the item specify that all disputes must be resolved in California
under California law. In this model, unseen contract terms are no
more and no less significant than unseen internal design features;
and it is not remarkable that there is no choice other than the
take-it-or- leave-it choice not to buy the package.
The contract-as-product model may describe a great
deal of modern commercial practice, even before commerce started
to move online. Commercial practice has long deviated from the traditional
picture of minds meeting about terms, or autonomous consent. Nevertheless,
the traditional picture hangs on in the conceptual apparatus legal
actors bring to bear on contracts and contract disputes, and it
is instantiated sometimes in commercial practice.
How will the move online affect contract, especially
the disjunction-and hitherto uneasy coexistence-between the picture
of contract-as-consent and the real world of contract-as-product?
Two interrelated sets of questions arise here: one revolves around
the future of the ideal of voluntary commitment, the other around
the future of entitlement regimes, such as privacy and intellectual
property. With respect to the ideal of voluntary commitment, will
the move online exacerbate the disjuncture between the consent-based
picture and the reality of transactions? Or, on the contrary, will
availability of customization online to some extent create consent-based
transactions where we do not have them now? With respect to the
future of entitlement regimes, we should recognize that such regimes
could become unstable because of waivers in ubiquitous form contracts.
At least, we will have to start arguing about whether the normative
backing of any entitlement rule is strong enough to make it nonwaivable
by contract, so property arguments might metamorphose into arguments
about impermissible contract terms.
Humans, Computers, and Binding Commitment,
75 Ind. L. J. 1125, 1125-26 (2000). Which view of contract does ProCD
embody?
5. Why do you think the result of the "clickwrap"
contract case (Specht v. Netscape) was different from ProCD?
Is is because of a fundamentally different view of contract, or a
different set of facts? Note that the Specht case itself notes differing
outcomes within the Southern District of New York. Are you convinced
by the court's explanation of the differences? If you were advising
a client who wanted a clickwrap contract, what would you say?
6. How do you think the law will deal with the other
forms of contracts mentioned above? Is there a need for specific legislation,
or will the law evolve to take care of the issues?
[ notes
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[ pageprints
[ audio ]
C
O P Y R I G H T © 2001 R. P O L K W
A G N E R.
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