E-COMMERCE LAW UPDATE - UETA & UCITA Background: Historically, in the United States, commercial agreements (and disagreements) were governed by the varying laws and court decisions of each state. As the U.S. economy grew, the disparate orientations and diversity of state laws created difficulties for companies whose business crossed state lines, particularly thosewho transacted in tangible goods. Uniformity became necessary to bring order and efficiency to commercial dealings. In 1940 the National Conference of Commissioners on Uniform State Laws (NCCUSL), consisting of lawyers, judges, academics, legislators and others from all U.S. states and territories, commenced work on the Uniform Commercial Code (UCC). The Code was designed to bring comprehensive and predictable legal solutions to commercial transactions. It took ten years to complete the body of laws, and fourteen years thereafter to be enacted by every state (except Louisiana). The UCC has since been the foundation upon which various types of commercial arrangements have been based, consisting of numerous default rules, gap fillers and risk allocation provisions for contracts unless, in some instances, the transacting parties otherwise agreed. It attempts to answer such questions as when and on what terms a contract is formed, when a deal must be in writing, warranties, assignment of interests, and remedies for breach. The UCC has generated an entire body of legal terms and analyses , including the well-known "Battle of the Forms," where the UCC helps determine which merchant's form contract or particular terms will prevail. Transitions: The UCC's framework embodies, in various "Articles," such business dealings as sales and leases of personal property, fund and wire transfers, letters of credit, warehouse receipting and documents of title, brokerage, banking and secured transactions. It has been modified over time, either through amendments by the individual states or by the NCCUSL for presentation to state legislatures for further adoption. Much of the UCC has been updated and made electronically friendly. For example, the Statute of Frauds, a rule requiring the existence of a written contract in certain cases, has essentially been written out of Article 8 (now permitting electronic brokerage transactions). In fact, except for Articles 2 (sales of goods) and 2A (leases of goods), most of the UCC presently acknowledges electronic transfers and transactions; i.e., it is electronically friendly. Current Landscape: Statistics indicate the trend in e-commerce: (1) Expected B2B internet-based transactions by 2002: $1.3 trillion; (2) Current number of web sites in the United States: 3.6 million. Additional sites being added per month: 275,000; (3) E-commerce retail sales are expected to double from $40 billion to $80 billion by 2002; (4) People on the internet: 3 million in 1994 / 100 million in 1998 / estimated by 2005: 1 billion worldwide. E-business is growing in such proportions and at such speed as to have caused rapid state and federal legislative activity to try and maintain order or at least parity with preexisting contract law. Rather than add to the UCC as originally contemplated, the NCCUSL within the past year approved the standalone Uniform Electronic Transactions Act (UETA) and Uniform Computer Information Transactions Act (UCITA). UETA: UETA was drafted as a set of procedural rules covering e-commerce. It acknowledges the existence of "electronic agents" that automate transactions and gives a framework for the enforceability of these automated exchanges as well as the general, enforceability of electronic signatures and communications in the context of any business, commercial or governmental transaction. This set of rules was drafted in recognition of barriers to e-commerce presented by traditional Statute of Frauds rules (required hard copy signatures and writings) and hard copy record retention laws. It does not supercede existing substantive laws, but gives a legal stamp of approval to electronic transactions where the contracting parties have agreed to conduct their business electronically. UETA was approved by NCCUSL in July of 1999 and has so far been adopted as law by the legislatures of Arizona, California, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Nebraska, Oklahoma, Pennsylvania, South Dakota, Utah and Virginia. It has been introduced but not yet passed in Alabama, Colorado, Delaware, the District of Columbia, Hawaii, Michigan, New Jersey, North Carolina, Ohio, Rhode Island, Vermont and West Virginia. B2B internet confirmation and authentication technologies or practices appear to take on heightened importance in light of UETA. Legal consequence will follow from commercial digital interactions. Names included in emails, for example, might be considered "signatures." Orders might be deemed made or other records sent when "addressed" or "otherwise directed properly" to a target information processing system, and deemed received when they enter that target system. The speed with which this happens affords little time for reflection. Thus, while UETA expressly leaves it to other substantive laws (like UCC Article 2 for sales of goods, UCITA, common law, tort law, other state or federal laws or regulations) to answer open questions regarding the meaning of what was "signed" or sent, UETA does give legal effect to these timing and signature issues. For fully automated transactions, it will be important to have confidence in the effectiveness of a business's electronic agent protocols (e.g., is it competently and reliably pre-programmed to accept, reject or counter a price, manner of shipment, quantity for delivery, etc.?). UETA also cuts in favor of stepped up security and privacy procedures in light of its "attribution and effect" rules. Whatever procedures a business uses to manage risk (cryptography, unauthorized intrusion detection, access controls, follow-up phone calls or faxes, etc.), UETA says these procedures will be one way of establishing whether and to whom we should attribute the content and effect of an electronic record or signature. UCITA: UCITA is the first uniform body of contract law dealing specifically with transactions in information technology, and has been a source of contentious debate. It was promulgated on July 29, 1999, to be presented to the various state legislatures for consideration and adoption. It was under consideration (originally as proposed Article 2B of the UCC) for a decade. As of June 2000, it has been adopted by Virginia and Maryland in modified form. It has been introduced but not yet passed in Delaware, the District of Columbia, Hawaii, Illinois, New Jersey and Oklahoma, and is expected to be introduced in numerous 2001 state legislative sessions. One example of some legislative controversy over UCITA is presented by Iowa, in which an amendment to UETA was introduced providing that a contractual choice of law clause that selects the law of a jurisdiction where UCITA applies will not be enforceable. This amendment has not yet passed in Iowa. UCITA covers only contracts that create, modify, transfer or license "computer information." This new body of substantive law covers primarily technology licensing agreements, and includes software and database sales, exchanges and access agreements, software and multimedia development agreements, and internet distribution agreements. It creates a distinct set of default rules consisting of nine "Parts" (general provisions, contract formation & terms, construction or interpretation of agreements, transfer of interests and rights, warranties, contract performance, breach of contract, remedies, and miscellaneous provisions). UCITA is well over a hundred pages long, and as with the UCC, may be opted out of by contracting parties, though this is limited by some of the Act's provisions regarding principles of consumer protection, unconscionability and other federal and state laws. The Act specifically states it is preempted by applicable federal law and essentially provides that certain contract provisions will have to yield to such public policy issues as free speech and fair comment. Courts would have to balance these issues. The Act also provides that it does not supercede existing intellectual property law. A major concern raised by UCITA has been uncertainty as to whether it permits contracting parties to preclude reverse engineering (thus impeding interoperability and other lawful uses). The NCCUSL drafters respond that trade secret, copyright and other applicable law will have to answer these questions. It should be noted, however, that the NCCUSL might be meeting again in July 2000 to address these and other concerns regarding UCITA. UCITA creates new warranties and extends certain protections to consumers and businesses in mass-market license situations. There are implied warranties to end-users that computer programs are fit for the ordinary purposes for which they are used. As to distributors, there are implied warranties that programs are adequately packaged and labeled and that programs conform to promises made on labels. There are implied warranties that a merchant's informational content is accurate. There are implied warranties that computer information being transacted is fit for the purpose intended and that components will work together as a system. As with the UCC, these warranties can be disclaimed, though there are a number of limitations and exceptions to these rules. Much of the controversy surrounding UCITA involves consumer protection issues, since the Act specifically endorses the use of shrink or click-wrap licenses in mass-market sales, within specified parameters (not unconscionable and assent has been manifested) and with certain cancellation rights. In B2B transactions, where there is a "battle of the forms" or controversy regarding terms and conditions, UCITA essentially endorses the UCC analysis (what were the surrounding circumstances, what was the parties' course of dealing, what is common usage in the trade, etc.), though additional specific rules are provided. UCITA further alters rules related to choice of law. The UCC will give force to a contractually agreed upon choice of law (i.e., an agreement between parties as to which state or country's law shall apply to the transaction) provided the law chosen bears a "reasonable relationship" to the transaction. UCITA permits contractual choice of law provisions unless they are "unconscionable," violate the "fundamental public policy of a state," or alter any mandatory consumer protection law that would apply if no choice of law had been made. It is an apparent expansion of the right to choose an applicable state's law in B2B transactions, and a further limitation on the right to choose in a consumer transaction. In a situation where no choice of law clause exists in an agreement, UCITA provides it is the jurisdiction of a licensor's principal place of business for internet transactions, the jurisdiction where tangible goods are to be delivered in consumer transactions (e.g., the consumer's state), and the jurisdiction with the "most significant relationship to the transaction" for all other cases. Choice of a foreign jurisdiction's law will be given effect "only if it provides substantially similar protections and rights" as provided under UCITA. Summary: The law inevitably plays catch-up to innovations and technological advances in commercial transactions. While UETA and UCITA attempt to deal with new modes of commerce, e-based businesses will, for the foreseeable future, still be impacted by changing state and federal legislative tides.
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