Ecommerce Transactions

This page introduces the reader to the direction of Electronic Commerce in the United States, by providing a summary of recent legislation governing electronic signatures applied to U.S. and Foreign Commerce.

Electronic Signatures in Global and National Commerce Act

On June 30, 2000, the President of the United States signed the Electronic Signatures in Global and National Commerce Act (15 U.S.C.A. § 7001) (the "E-Sign Act"). The major provisions of the E-Sign Act became effective on October 1, 2000. The E-Sign Act was intended to spur the growth of electronic commerce by insuring that electronic contracts, signatures, and records will have the same legal status and effect as their ink and paper counterparts. Specifically, the E-Sign Act provides that a signature, contract, or other record relating to a transaction cannot be denied legal effect, validity or enforceability merely because it is in electronic form.

By adopting the E-Sign Act, the U.S. Congress sought to create consistent legal standards to govern the enforceability of contracts created by parties using "Electronic Signature." The new law defines an "Electronic Signature" as an electronic sound, symbol, or process, created by an individual and executed by that person with an intent to sign a record. For example, one who receives a contract offer via e-mail may enter into the contract by e-mailing in reply that he or she accepts the offer stated in the original e-mail below. However, a party to an electronic agreement must clearly express his consent to be bound by the terms of the contract. Litigation may still arise if one party does not definitely express its intent to be bound or if the terms of the agreement are not stated clearly. The E-Sign Act is intended to be technology-neutral. What that means, is that a variety of technologies can function as Electronic Signature, including, Passwords, Smart Cards, Digital Certificates, and Biometrics (such as fingerprint recognition and retinal scan technology).

General Scope of the E-Sign Act

The E-Sign Act applies to transactions in both interstate and foreign commerce. The E-Sign Act prohibits denying the validity, enforceability or legal effect of an electronic signature, agreement, or record, solely on account of the fact that such signature, agreement, or record is an electronic form. The E-Sign Act is intended to clarify the legal status of electronic signatures and records in the context of existing legal requirements with respect to writings or signatures. This did not limit, however, the ability to assert that an electronic signature is: (i) forgery, (ii) used without authority, or (iii) for reasons that would invalidate the effect of a traditional written signature (e.g., lack of capacity).

To satisfy concerns that consumers might be unfairly disadvantaged by the use of electronic signatures and records, the E-Sign Act sets forth special rules that must be followed when the provider of a record ("Provider") must provide or make written records available to a consumer. Electronic records, which take the place of records that are required to be provided to a consumer in writing must be capable of review, retention, and printing by the consumer, as long as the consumer is using the hardware and software specified by the Provider.

The E-Sign Act provides that the consumer must affirmatively consent to the use of electronic records and the consumer must not have withdrawn his or her consent to the use of electronic records. To satisfy the consent requirement, the consumer must consent electronically, or confirm consent electronically, in a manner that reasonably demonstrates that he or she can access the records in the electronic format used by the Provider.

E-Sign and UETA

E-Sign preempts otherwise applicable state law unless the state law either consists of the adoption of the Uniform Electronic Transactions Act (UETA) or is technologically neutral. E-Sign and UETA comprise a statutory framework for contracts established over the Internet or other electronic data communications networks (as opposed to more traditional means involving paper and ink signatures). E-Sign and UETA are similar in concept, although E-Sign is more consumer and government focused in coverage, and UETA is more broad-based in coverage. Neither Act purports to change the application of any law governing the specific terms of contracts to which they apply.

E-Sign includes detailed requirements as to the type of notice and consent that will bind consumers to use electronic signatures. UETA provides that whether the parties agree to conduct the transaction by electronic means is determined from the context and surrounding circumstances, including the party's conduct, which most likely also applies to transactions governed by E-Sign. Both Acts provide that each party to an electronic agreement have an unwaivable right to decline to conduct other or further transactions in the same manner.

While UETA was passed in at least 18 states as of July 2000, UCITA (formerly proposed article to the Uniform Commercial Code) has proven controversial and has only been enacted in two states, Maryland and Virginia. As an example, UCITA, while validating shrink-wrapped software licenses, also increases rights of licensors versus licensees has the possibility of further complicating outcomes of intellectual property right to transfers, by, for example, creating different outcomes for the same contractual provisions incorporated into hard copy agreements versus electronic agreements. 

Electronic Contracts and Online Terms

Companies doing business on the web should seek qualified legal advice to properly structure the relationships with clients and information providers to strike the balance between the freedom of cyberspace and potential liabilities in the material world.

Traditional rules governing contract formation apply to online contracting, with the exception of issues peculiar to the Internet environment. The primary concern regarding Internet contract formation and the enforcement is the relative anonymity of the parties to any given transaction. When a company conducts business with a party with whom it has no prior relationship, concerns regarding enforceability may arise where, for example, the party is a minor, or where the party purporting to contract on behalf of an organization lacks authority to do so.

User Agreements

There are two common ways to define users of a website. A "Clickwrap" is a screen or a page that presents legal trends to the user and requires the users to click "I Agree" or some similar wording before gaining access to the site or completing the transaction. "Terms and Conditions" or "Terms of Service" are legal terms usually accessible through a link at the bottom of the home page of the site, the review of which is not a condition precedent to obtaining information and completing a transaction. Clickwraps are preferred where it is more likely that a user will challenge provisions of a website agreement.

Clickwraps and Terms and Conditions should include, at a minimum, proprietary rights notices, disclaimers of liability and warranty for the sale, linking disclaimers, framing prohibitions, governing law and jurisdiction, language conveying rights to use any content submitted to the site, refund or return policies (if applicable), rules for games or sweepstakes (if applicable), a prohibition on using the site to post obscene, infringing or unlawful material, and rules regarding the conduct on bulletin boards, chat rooms, etc. (if applicable).

Choice of Law and Jurisdictional Issues

In the United States, courts generally divide up the world of websites into three categories: "Active" websites by which companies "do business" online, "Passive" websites that simply provide information (e.g., advertise the company and/or provide a map to the nearest office), and a third catch-all category (where there are some interactive capabilities but no active commerce). A company running the first category of website will be subject to personal jurisdiction in all states where it does business, while a company running the second category of site usually will not. Courts typically conduct a factual inquiry, basing inquiries for the third category of website.

Interesting issues also arise in the international arena regarding choice of law and jurisdiction. European Consumer Protection laws may apply when companies make sales to European consumers over the Internet. A directive that has been implemented in all member states of the European Union mandates that the law governing the consumer contract is always the law of the domicile of the consumer. In Germany, moreover, the Parliament has passed a sweeping law subjecting all websites accessible from Germany to German law.

Software Licenses
Unlike the mass marketing of computer software in tangible form, online distribution lends itself quite naturally to the use of a form license agreement. When a user comes to a website to locate and download computer software databases, the user can be required to review the terms of any applicable license agreement and to affirmatively assent to those terms before the software can be downloaded. The user is generally asked to review the terms of the agreement and to indicate assent by clicking on a button/hence the name "Clickwrap" license. In this way, the vendor can insure that, to the extent a court does not find the license to be an unenforceable contract, the contract has been formed prior to the acceptance of payment or the downloading of the software. The vendor should obtain as much information on the person clicking the "Accept" button as possible for evidentiary purposes in case enforcement of the terms of the license is required. Any online ordering system for computer software databases should include the following steps:

  1. Notify the purchaser of the purchase price for the software;
  2. Notify the purchaser that the use of the software will be subject to the terms of a license agreement, and that the vendor will not enter into the transaction unless that purchaser agrees to the terms;
  3. Requires purchaser review the entire license agreement before accepting an order and that he/she respectfully assent to the terms by taking some affirmative action, such as by clicking on an "Accept" button, before the software can be downloaded; and
  4. Provide the purchaser with the ability to reject the terms of the agreement and terminate the transaction.

Internet Strategic Alliances

Success in Internet-based businesses is increasingly dependent upon strategic alliances between providers of information, goods, services and user traffic. The expanding range of items on the Internet makes it impractical for anyone's enterprise to integrate solely and vertically the development, dissemination and provision of sufficient Internet functionality to compete with the offerings of the many more specialized providers. Contracts between Internet companies establishing cooperative relationships are as varied as Internet offerings themselves, but usually include links on one or both parties' websites that lead Internet users to the other party's website, or enable services or other functionality provided by the other party. In negotiating and drafting strategic alliance agreements between Internet companies, there are several key business issues, including, but not limited to, (a) advertising, (b) branding, (c) development, and (d) liability.

  1. Advertising.(unintelligible) states the advertisers on a website are an important source of revenue for providers of Internet "content." If a party with a website that attracts many "hits" enters into an agreement that will direct some of that traffic to the other party's website, the first party may want to share in the traffic recipient's revenues generated from hits derived as a result of the relationship. In other cases, a party may only provide "back room" functionality. Whether and how advertising revenues are allocated will vary depending on which party is supplying the most Internet visits, and which party is in the best position to display advertising to Internet visitors.
  2. Branding.The ability to track customer goodwill is often proportional to the distinctiveness and famousness of the trademarks associated with a website. However, innovative functionality also attracts hits, and continuing innovation is valuable in maintaining the words of Internet-based trademarks. As a result, rights of each party to the other party's trademark should be precisely defined in any Internet alliance agreement. As with tangible goods, to avoid jeopardizing its trademarks, a trademark licensor must be in a position to enforce quality standards and use restrictions on the licensee.
  3. Development.If a party to an Internet strategic alliance agreement needs to change its offering in order to achieve the desired results, all of the business and drafting issues surrounding a software development agreement also come into play. From the perspective of the party dependent on another's development efforts to the extent possible, payment should be dependent on the achievement of development milestones. From the perspective of the party doing the development, milestones and acceptance criteria should be defined as precisely as possible when the agreement is signed. If functionality is to be provided via a particular party's website or framed by a particular party's image and advertising, this should be specified in a description of the development deliverables. One party, if applying its proprietary display to another party's custom data, the agreement should specify which party owns the display format and which party owns the data and data format.
  4. Liability.Care should be taken to assign liability resulting from Internet-specific mishaps, including, but not limited to:
    • Computer viruses;
    • Corrupted user data;
    • Infringement of intellectual property rights and, more generally, failure of a party to own sufficient intellectual property rights to enable its performance;
    • Liability attributable to non-party sites accessible from websites subject to the alliance agreement;
    • Inflammatory or illegal information posted or transmitted by users;
    • Loss of confidential information;
    • Software failure; and
    • Hardware and transmission failures

Content Issues
In any business arrangement, you will want to make sure that the company owns all the information and ideas expressed in online articles and other printed material offered by the company. From the interior design company you will want assurances that any contents they provide for display on your company's website is accurate and not defamatory, sexually-oriented, racially offensive or otherwise unlawful. Another disclaimer that you may want to add is that the interior design company is solely responsible for content of the material it provides for display on your company's website.

Chat

Online Chat can raise several legal issues. For example, a customer might use the Chat feature to express racial slurs or to defame another user of the Chat room feature. This type of misuse of the Chat feature can discourage other customers from taking advantage of the online service. Furthermore, it can lead to litigation among those who are involved or, sometimes, the company itself. In order to protect itself, the company is well-advised to maintain a policy concerning the contents of messages provided online by customers. Such a policy would make it clear that:

  • Defamatory, obscene, profane, and other offensive language is prohibited;
  • Customers may not post any illegal material or participate in chats with a view to engaging in illegal activities; and
  • The contents of customer messages are solely the customer's responsibility.

Another legal issue raised by a Chat service is ownership of the messages posted by customers. The company should take the position that any submission of ideas and information contained in customer messages and communications with the company are not confidential and, thus, can be freely used by the company. Also, it is important that users of the Chat service acknowledge and agree that the ideas and information expressed in their messages do not infringe upon the copyrights or other intellectual property rights of others.

 

 

 

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