Law 619 | Electronic Commerce

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E 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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eContracts II: UCITA, etc. on Formation

[ Class Exercise 1 ]

R E A D I N G S

In the prior section, we took a look at how the current law is adapting to meet the challenge of eContracts.

In this section, we'll discuss how legislative action is reshaping the legal infrastructure for electronic commerce. Our inquiry will focus on two particular projects initiated by the National Commissioners on Uniform State Laws.

The first is the Uniform Computer Information Transactions Act ("UCITA"), which was formerly known as (proposed) Article 2B of the UCC.

The second is the Uniform Electronic Transactions Act ("UETA").

Each of these documents has different goals, and different scope. Of the two, UCITA has garnered the most attention, and is probably the most significant, for reasons that we shall see below.

The Prefatory Note to UCITA is as follows:

Uniform Computer transactions act (UCITA)

"A commercial contract code for the computer information transactions"

Once land ownership and agrarian production were primary sources of wealth and income in our economy, and contracts for the exchange of horses and grain dominated the commercial landscape. Following the industrial revolution, manufactured goods assumed center stage. In the 1930s Llewellyn recognized that this change required revisions to the law of sales, so that its rules were relevant to the new economy. The result was UCC Article 2. Despite initially strong resistance, Article 2 won universal acceptance, for it reflected the reality of economic change and its implications for contract law.

Our economy has experienced another fundamental change, with information products and services now driving increased productivity and growth. Accompanying this change is a widely diverse and rich array of methods for distributing and tailoring digital information to the modern marketplace. Contracts underlie both the creation and distribution of such information. However, legal rules that are not relevant to commercial practice or that are uncertain in application inhibit contracting or raise transaction costs. UCITA was drafted in response to this fundamental economic change and need for clarity in the law.

Article 2 served as both a model and a point of departure for UCITA. Like Article 2, UCITA covers a variety of transactions, many of which take place solely between merchants. Article 2 governs sales of jet planes as well as toasters, not to mention the large-scale acquisition of jet and toaster parts. UCITA governs access by Fortune 500 businesses to sophisticated databases as well as distribution of software to the general public; it also covers custom software development and the acquisition of various rights in multimedia products.

Both UCITA and Article 2 are based upon the principle of freedom of contract: with limited exceptions, the terms and effect of a contract can be varied by agreement. Most provisions of both statutes are default rules, applicable only if the parties do not specify some other rule. Although one could try to fashion a contract code that regulates comprehensively rather than permitting such flexibility, it is hard to imagine such an approach being compatible with a vibrant market economy. Even if one succeeded in making the regulations stick, the effect would be to hinder rather than facilitate commerce. On the other hand, as noted, without certain default rules, contracting and thus legal rights remain unclear.

To be sure, not every contract should be enforced. UCITA follows Article 2 in providing a standard of unconscionability for courts to employ in policing contract terms. UCITA goes beyond Article 2 in authorizing courts to strike down over-reaching language that conflicts with fundamental public policy. UCITA provides that common law doctrines such as fraud and duress remain effective. UCITA does not alter competition or antitrust law. It does not change trade secret law, intellectual property law, or substantive consumer law. It deals only with contracts.

As Llewellyn recognized in drafting Article 2, contract law must be tailored to the type of transactions that it covers. Just as a body of law based on images of the sale of horses was not relevant a half century ago to sales of manufactured goods, so today a body of law based on images of the sale of manufactured goods ill fits licenses and other transactions in computer information. Rules based on an antiquated view of the transactional world do not give coherent guidance to courts or to transacting parties.

UCITA is the first uniform contract law designed to deal specifically with the new information economy. Transactions in computer information involve different expectations, different industry practices, and different policies from transactions in goods. For example, in a sale of goods, the buyer owns what it buys and has exclusive rights in that subject matter (e.g., the toaster that has been purchased). In contrast, someone that acquires a copy of computer information may or may not own that copy, but in any case rarely obtains all rights associated with the information. See DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999). What rights are acquired or withheld depends on what the contract says. This point only is implicit in Article 2 for goods such as books; UCITA makes it explicit for the information economy where, unlike in the case of a book, the contract (license) is the product.

Licensing is one way in which computer information is tailored to the information marketplace. Courts have enforced contract terms that, among other things:

preclude commercial use
permit commercial use
preclude making copies
permit making multiple copies
grant access
limit access
allow use throughout a site
limit use to a specific computer
preclude distribution of copies for a fee
allow distribution of copies
preclude modification
allow modification
allow distribution only in specific way
limit use to internal operations

Such contract terms have helped to create the wondrous array of products and services that characterizes our modern economy. Whether specific terms are appropriate for a given transaction or set of parties is fundamentally a marketplace issue.

As noted, in computer information transactions, license terms often define the product. A software product may be provided in the same form in two transactions, but in one case the user is authorized to make 100,000 copies and in the other merely to use a single copy at home. The value of the transaction inheres not in the tangible medium (if, indeed, any is used), but rather in the license grant terms. UCITA does not require that computer information products and services be licensed; it covers sales as well. But UCITA provides a coherent contract law framework for analyzing a license, which has been the dominant contractual framework for commerce in computer information.

Up to this point, a complex mix of common law and Article 2 has governed computer information transactions. The common law is frequently difficult to ascertain, and it varies widely among states. In addition, differences in the legal norms that have developed in different areas of information practice are producing unpredictable results as those areas converge. Article 2, while uniform, does not properly apply to many issues involved in transactions in computer information, and when it applies, it often does not provide appropriate guidance because of differences in subject matter and transactional frameworks.

The need for a coherent, uniform body of law has never been greater. Revolutions in telecommunications and computer technology have made geography increasingly irrelevant to modern commerce. The Internet enables small firms as well as large ones to provide products and services throughout the country and around the world. Even as online systems have altered how many information transactions are performed, however, fundamental issues associated with contracting online remain unanswered. A modern contract law must give guidance on those issues. Failure to do so does not foster but rather impedes commerce in computer information.

The liberating promise of technology cannot be fully realized unless there is predictability in the legal rules that govern such transactions. This is the need that UCITA addresses. It clarifies and sets forth uniform legal principles applicable to computer information transactions. UCITA is a statute for our time.

The prefatory notes for UETA state as follows:

DRAFT PREFATORY NOTES

With the advent of electronic means of communication and information transfer, business models and methods for doing business have evolved to take advantage of the speed, efficiencies, and cost benefits of electronic technologies. These developments have occurred in the face of existing legal barriers to the legal efficacy of records and documents which exist solely in electronic media. Whether the legal requirement that information or an agreement or contract must be contained or set forth in a pen and paper writing derives from a statute of frauds affecting the enforceability of an agreement, or from a record retention statute that calls for keeping the paper record of a transaction, such legal requirements raise real barriers to the effective use of electronic media.

One striking example of electronic barriers involves so called check retention statutes in every state. A study conducted by the Federal Reserve Bank of Boston identified more than 2500 different state laws which require the retention of canceled checks by the issuers of those checks. These requirements not only impose burdens on the issuers, but also effectively restrain the ability of banks handling the checks to automate the process. Although check truncation is validated under the Uniform Commercial Code, if the bank's customer must store the canceled paper check, the bank will not be able to deal with the item through electronic transmission of the information. By establishing the equivalence of an electronic record of the information, the UETA removes these barriers without affecting the underlying legal rules and requirements.

A. Scope of the Act and Procedural Approach. The scope of this Act provides coverage which sets forth a clear framework for covered transactions, and also avoids unwarranted surprises for unsophisticated parties dealing in this relatively new media. The clarity and certainty of the scope of the Act have been obtained while still providing a solid legal framework that allows for the continued development of innovative technology to facilitate electronic transactions.

With regard to the general scope of the Act, the Act's coverage is inherently limited by the definition of "transaction." The Act does not apply to all writings and signatures, but only to electronic records and signatures relating to a transaction, defined as those interactions between people relating to business, commercial and governmental affairs. In general, there are few writing or signature requirements imposed by law on many of the "standard" transactions that had been considered for exclusion. A good example relates to trusts, where the general rule on creation of a trust imposes no formal writing requirement. Further, the writing requirements in other contexts derived from governmental filing issues. For example, real estate transactions were considered potentially troublesome because of the need to file a deed or other instrument for protection against third parties. Since the efficacy of a real estate purchase contract, or even a deed, between the parties is not affected by any sort of filing, the question was raised why these transactions should not be validated by this Act if done via an electronic medium. No sound reason was found. Filing requirements fall within Sections 17-19 on governmental records. An exclusion of all real estate transactions would be particularly unwarranted in the event that a state chose to convert to an electronic recording system, as many have for Article 9 financing statement filings under the Uniform Commercial Code.

The exclusion of specific Articles of the Uniform Commercial Code reflects the recognition that, particularly in the case of Articles 5, 8 and revised Article 9, electronic transactions were addressed in the specific contexts of those revision processes. In the context of Articles 2 and 2A the UETA provides the vehicle for assuring that such transactions may be accomplished and effected via an electronic medium. At such time as Articles 2 and 2A are revised the extent of coverage in those Articles/Acts may make application of this Act as a gap-filling law desirable. Similar considerations apply to the recently promulgated Uniform Computer Information Transactions Act ("UCITA").

The need for certainty as to the scope and applicability of this Act is critical, and makes any sort of a broad, general exception based on notions of inconsistency with existing writing and signature requirements unwise at best. The uncertainty inherent in leaving the applicability of the Act to judicial construction of this Act with other laws is unacceptable if electronic transactions are to be facilitated.

Finally, recognition that the paradigm for the Act involves two willing parties conducting a transaction electronically, makes it was necessary to expressly provide that some form of acquiescence or intent on the part of a person to conduct transactions electronically is necessary before the Act can be invoked. Accordingly, Section 5 specifically provides that the Act only applies between parties that have agreed to conduct transactions electronically. In this context, the construction of the term agreement must be broad in order to assure that the Act applies whenever the circumstances show the parties intention to transact electronically, regardless of whether the intent rises to the level of a formal agreement.

B. Procedural Approach. Another fundamental premise of the Act is that it be minimalist and procedural. The general efficacy of existing law, in an electronic context, so long as biases and barriers to the medium are removed, confirms this approach. The Act defers to existing substantive law. Specific areas of deference to other law in this Act include: 1) the meaning and effect of "sign" under existing law, 2) the method and manner of displaying, transmitting and formatting information in section 8, 3) rules of attribution in section 9, and 4) the law of mistake in section 10.

The Act's treatment of records and signatures demonstrates best the minimalist approach that has been adopted. Whether a record is attributed to a person is left to law outside this Act. Whether an electronic signature has any effect is left to the surrounding circumstances and other law. These provisions are salutary directives to assure that records and signatures will be treated in the same manner, under currently existing law, as written records and manual signatures.

The deference of the Act to other substantive law does not negate the necessity of setting forth rules and standards for using electronic media. The Act expressly validates electronic records, signatures and contracts. It provides for the use of electronic records and information for retention purposes, providing certainty in an area with great potential in cost savings and efficiency. The Act makes clear that the actions of machines ("electronic agents") programmed and used by people will bind the user of the machine, regardless of whether human review of a particular transaction has occurred. It specifies the standards for sending and receipt of electronic records, and it allows for innovation in financial services through the implementation of transferable records. In these ways the Act permits electronic transactions to be accomplished with certainty under existing substantive rules of law.

UCITA and UETA on Contract Formation

Each of these model laws takes a different approach to issues of eContract formation:

UCITA §§ 101-104, 201-211 (relevant to contract formation) (pdf, 28 kb)

UETA (relevant to contract formation) (pdf, 8 kb)

Additional UCITA Information:

(43) "Mass-market license" means a standard form used in a mass-market transaction.

(44) "Mass-market transaction" means a transaction that is:

(A) a consumer contract; or

(B) any other transaction with an end-user licensee if:

(i) the transaction is for information or informational rights directed to the general public as a whole, including consumers, under substantially the same terms for the same information;

(ii) the licensee acquires the information or informational rights in a retail transaction under terms and in a quantity consistent with an ordinary transaction in a retail market; and

(iii) the transaction is not:

(I) a contract for redistribution or for public performance or public display of a copyrighted work;

(II) a transaction in which the information is customized or otherwise specially prepared by the licensor for the licensee, other than minor customization using a capability of the information intended for that purpose;

(III) a site license; or

(IV) an access contract.

SECTION 305. TERMS TO BE SPECIFIED. An agreement that is otherwise sufficiently definite to be a contract is not invalid because it leaves particulars of performance to be specified by one of the parties. If particulars of performance are to be specified by a party, the following rules apply:

(1) Specification must be made in good faith and within limits set by commercial reasonableness.

(2) If a specification materially affects the other party's performance but is not seasonably made, the other party:

(A) is excused for any resulting delay in its performance; and

(B) may perform, suspend performance, or treat the failure to specify as a breach of contract.

Class Exercise

This class session is a little different from our usual. For this class, we'll break into groups to work on a series of exercises. For ease of administration, we'll use just six groups:

Group A: contains members of Groups 1, 7

Group B: contains member of Groups 2, 8

Group C: contains members of Groups 3, 9

Group D: contains members of Groups 4, 10

Group E: contains members of Groups 5, 11

Group F: contains members of Groups 6, 12

Each group will separately consider the following two parts of the exercise, reporting their consensus at the end of class:

Part I: UCITA Hypotheticals

The basic transaction:

Albert (A) operates a web site, offering "downloadable electronic widgets" "DEWs" for sale.

Betty (B) is in the market for some DEWs.

A and B want to agree to exchange DEWs for money, using the Internet.

For each of the following cases, consider whether there has been a contract formed under UCITA, and whether all the terms of the contract are included:

[1] B uses an electronic agent to contact A, establishing the price of $10,000 for 500 DEWs. B downloads the DEWs from A's web site.
[2] A places the following statement on his web site, on the page in which B fills in her credit card number: "This transaction will be governed by the terms and conditions which will be downloaded with the DEWs." B downloads the DEWs.
[3] A posts the terms and conditions of the agreement on his web site. These terms include the following statement: "we reserve the right to amend, modify, or vary this agreement at any time during its duration with or without notice to you." B downloads the DEWs.

[4] A's web site offers the DEWs at $5.00 each. B sends a message to A, stating: "I accept your offer, and will pay $4.00 for each DEWs," and then downloads the DEWs

[5] A's web site lists DEWs at $5.00 each. There is no apparent opportunity to negotiate. Upon downloading, each DEW is associated with a set of "terms and conditions," one term of which is that "the license to use the DEW expires in 30 days."

Part II: The UCITA Debate

So far, only Virginia and Maryland have passed UCITA; attempts to do so in other jurisdictions have met with great resistance. In this part of the Class Exercise, each group will assume the role of a state legislature, and consider the policy aspects of enacting UCITA and/or UETA. The bottom-line question is whetheryour state should pass UCITA.

In considering the policy aspects, consider the following questions and resources:

1. How does the scope of UCITA and UETA differ? What, precisely, is the scope of UCITA? Does the phrase "computer information transactions" helpfully define which contracts fall within UCITA and which fall without?

2. Does UCITA reach the same result as ProCD and Hill? Why or why not?

3. UCITA Online (pro-UCITA information clearinghouse) (includes a "State Legislators' Guide") (browse)

4. AFFECT: Americans For Fair Electronic Commerce Transactions (anti-UCITA information clearinghouse) (browse)

5. Pamela Samuelson, Forward: The Impact Of Article 2b Of The Uniform Commercial Code On The Future Of Information And Commerce, 13 Berkeley Tech. L.J. 809 (1998) (pdf, edited) (reviewing various objections to UCC Article 2B/UCITA)

6. Federal Trade Commission, Letter Opposing UCITA on Public Policy Grounds

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