Lecture 9: Commercial Transactions

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Lecture 9Commercial Transactions

• Mary Jo Dively, Vice President and General
  Counsel
• Carnegie Mellon University

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Whats a Commercial Transaction?

• Sales Contracts
• Generally for goods (toasters, cars, etc.)
• License Contracts
• Generally for intangibles (software, electronic
  media, etc.)
• Banking Transactions
• Negotiable instruments (checks, promissory notes,
  letters of credit, warehouse receipts, bills of
  lading)

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Sales vs. Licenses

• Sales
• Buyer receives title to goods
• Little or no continuing relationship between
  buyer and seller
• Terms of transaction flow from these
  principlesdelivery, performance, remedies
• Licenses
• Licensee receives bundle of rights as specified
  in license contract usually right to use along
  with other specified rights
• Title does NOT pass
• Continuing Relationship between Licensor and
  Licensee

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Uniform Commercial Code

• Principal commercial law in the US for past 50
  years codified then existing case law
• Enacted by each STATE variances among the states
• Separate Articles address different types of
  contracts (for example, Article 2 covers Sales of
  Goods, Article 9 covers Secured Transactions)

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UCC Article 2

• Covers sales of goods current draft excludes
  pure information contracts
• Sets up a basic framework for how to create an
  enforceable contract
• Overriding Principle Freedom of Contract
• Default Rules other than a handful of mandatory
  provisions, all provisions may be overridden by
  specific agreement between the parties to the
  particular contract

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Article 2 Offer and Acceptance

• A contract for the 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
  (2-204)
• Enforceable forms Writing, Oral, Conduct (all
  with varying requirements)

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Article 2 Warranties

• Basic Theme UCC states that Seller makes
  various promises about the quality of the product
  being sold
• If Seller does not wish to make such promises, it
  must DISCLAIM them, in the format provided by
  Article 2
• If Seller does NOT disclaim, it is deemed to have
  provided such warranties
• Goal Put Buyer on notice Buyer may then make
  decision to purchase a different product

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Is UCC Article 2 Sufficient for Information
Products?

• Information Products manufactured and distributed
  differently than mass marketed goods License v.
  sale
• Article 2 does not provide a sufficient framework
  for information contractingits provisions do not
  work mechanically for most information products
  which are licensed

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What is NCCUSL?

• Non profit body of approx. 350 lawyers, divided
  equally among private practitioners, law
  professors and judges
• Responsible for sophisticated uniform
  legislationUCC Article 2 for example
• Drafting Process
• States individually consider each uniform law

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My Role

• Acted as an ABA Advisor to the UCITA Drafting
  Committee attended every meeting of the DC
• Chaired the ABA committee that served as research
  resource for UCITA and UETA Drafting Committees
• Also attended most meetings of UETA Drafting
  Committee and
• After approval, and end of my ABA service, was
  engaged to represent a client to assist in state
  enactments of UETA and UCITA
• Recently appointed a NCCUSL Commissioner for
  Pennsylvania

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The Uniform Electronic Transactions Act

• State Law which is enacted in 40 states
• Purpose
• make sure that transactions in the electronic
  marketplace are as enforceable as transactions
  memorialized on paper and with manual signatures
• without changing substantive rules of law
• an electronic record of a transaction is the
  equivalent of a paper record, and that an
  electronic signature will be given the same legal
  effect, whatever that might be, as a manual
  signature.

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UETA Basic Rules

• A record or signature may not be denied legal
  effect or enforceability solely because it is in
  electronic form.
• A contract may not be denied legal effect or
  enforceability solely because an electronic
  record was used in its formation.
• Any law that requires a writing will be satisfied
  by an electronic record
• Any signature requirement in the law will be met
  if there is an electronic signature

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UETA, continued

• The rest of UETAs rules serve these four basic
  rules, and attempt to answer basic legal
  questions about the use of electronic records and
  signatures
• Parties must agree to conduct business
  electronicallyno one can be forced to do so
• Delivery
• Attribution

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UETA Sending Electronic Records

• an electronic record is sent when it
• (1) is addressed properly to an information
  processing system that the recipient has
  designated or uses for the purpose of receiving
  electronic records
• (2) is in a form capable of being processed by
  that system and
• (3) enters an information processing system
  outside the control of the sender or enters a
  region of the information processing system
  designated or used by the recipient which is
  under the control of the recipient
• An electronic record is received . . . Even if no
  individual is aware of its receipt

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UETA Transferable Records

• The law of negotiable instruments (checks,
  drafts, promissory notes, etc.) pays great
  attention to transferability and the holder in
  due course (rightful possessor without knowledge
  of fraud or defect)
• A negotiable instrument is token money (rightful
  possession is equivalent to ownership)
• Negotiable instruments are mde electronic through
  transferable records
• A transferable record is an electronic record
  that would be a negotiable instrument if it were
  wirtten and which the issuer has expressly agreed
  is a transferable record

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The Uniform Computer Information Transactions Act

• A uniform statute designed to codify current law
  and practice in contracts for computer
  information
• Scope is limited to transactions in Computer
  Information
• NOT intended to answer every specific question,
  but to provide a structure for courts to analyze
  questions
• Special rules for mixed transactions

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Enactments

• UCITA was enacted in Virginia after one year of
  study by a special legislative committee and
  consideration of numerous amendments, which were
  rejected by VA legislature. It was then reviewed
  by the legislature for a year thereafter, with no
  meaningful amendment, and took effect in 2000

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Enactments

• UCITA was enacted in 2000 by the Maryland
  legislature after full debate by Committees of
  House and Senate, and consideration of numerous
  amendments, almost none of which were accepted

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UCITA Applies to Transactions in Computer
Information

• An agreement or the performance of it to create,
  modify, transfer, or license computer information
  or informational rights in computer information.
• Computer information is information in electronic
  form which is obtained from or through the use of
  a computer or which is in a form capable of being
  processed by a computer

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Exceptions UCITA does not apply to

• financial services and insurance services
  transactions
• agreements related to the creation, performance
  etc. of movies and sound recordings
• employment contracts
• transactions where computer information is de
  minimis

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Special Rules for Mixed Transactions with Goods

• CI Goods UCITA applies to the CI, not the
  Goods Article 2 applies to the goods
• BUT, if CI is embedded software, and goods are
  not a computer or a computer peripheral, and
  access to the CI is not ordinarily a material
  purpose of such a transaction, then UCITA does
  not apply to the CI otherwise, it does

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Formation Rules

• Allows contracts to be made computer to computer,
  or human to computer
• Updates concepts to provide for electronics (e.g.
  definition of receipt is now whenever a message
  gets to recipients designated information
  processing system)
• Codifies existing case law of shrinkwrap/clickwrap
  contracts

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Section 105 Breaking Ground

• 4 Important Provisions
• Federal Law Preempts
• Terms Cannot Violate Public Policy
• Terms which prohibit lawful public comment are
  banned
• UCITA does not apply to IP noticesimportant
  provision for free software

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Fundamental Public Policy Rules

• Terms or Records which violate fundamental public
  policy of a state are unenforceable
• Examples Innovation, competition, fair comment,
  fair use
• Comments provide guidance for courts on how to
  apply 105

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Fair Comment

• Copy of CI in final form made generally available
• Prohibits clauses which prohibit otherwise lawful
  public comment
• Subject to other laws which legitimately support
  confidentialityi.e. trade secrets,
  non-disclosure, etc.

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The Rules on Shrinkwrap Contracts

• Has been a controversial topic
• Many alternatives considered
• The Result A licensee may not manifest assent
  to the terms of a license until it has had an
  opportunity to review the terms. If the license
  is presented post payment, then the license must
  provide a cost free right of return for the
  licensee.

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Clickwrap Contracts

• Formation Rules are the same as
  Shrinkwraps--licensee must have opportunity to
  review terms before manifesting assent
• Safe harbor to encourage pre-transaction
  disclosure of terms in Internet transactions

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What is Manifesting Assent?

• You manifest assent if, after having an
  opportunity to review a record or term, you
  authenticate (sign) the record or term, or
  intentionally engage in conduct or make
  statements with reason to know that the other
  party or its electronic agent may infer from the
  conduct or statement that you assent to the
  record or term.

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What is an Opportunity to Review?

• A person has an opportunity to review a record or
  term only if it is made available in a manner
  that ought to call it to the attention of a
  reasonable person and permit review.
• An electronic agent has an opportunity to review
  only if the record or term is made available in a
  manner that would enable a reasonably configured
  electronic agent to respond.

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Choice of Law and Choice of Forum

• Very important in cyberspace, where you might not
  know where the other party is, or they might be
  lying
• Follows existing common law
• Choices of law are enforceable, but special
  protections for consumers
• Choices of forum are enforceable as long as not
  unreasonable and unjust

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Warranties

• UCITA creates statutory implied warranties, for
  first time, in information transactions
• Warranties created
• Noninterference and Noninfringement
• Merchantability of computer program
• Informational Content
• Fitness for licensees purpose, system integration

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UCITA Controversies

• Consumer Advocates sought broad consumer
  protections in UCITA rather than leaving to
  individual states to develop, as has been
  traditional for CL
• Original Positions on Reverse Engineering, Public
  Comment and Electronic Self Help were
  significantly opposed
• Original positions on default rules for number of
  users and duration of license were significantly
  opposed
• Some law professors are opposed in principle to
  shrinkwrap contracts, despite the courts
  repeated and unchanging endorsement of same

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Key Changes in Response to ABA

• UCITA now expressly forbids clauses in licenses
  which prohibit most reverse engineering
• UCITA now expressly forbids clauses in licenses
  which prohibit public comment about the
  performance of software
• UCITA now expressly bans the use of electronic
  self help in all cases
• The default rules on number of users and duration
  of license have been deleted

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UCITAs future

• Unclear at this time
• Courts continue to express need for a law to
  govern information contracting, and to validate
  key UCITA approaches
• If UCITA is not passed in a critical number of
  states, it is likely that federal legislation
  will be introduced on the same subjectsimilar to
  what happened with UETA and E-Sign

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Concluding Thoughts

• The UCITA controversy, the reaction of the
  courts, and, to a certain extent, the differences
  between UETA and E-Sign, continue to underscore
  the need for information contracting law, and the
  difficulty in developing provisions which can
  satisfy all constituencies
• Meanwhile, new concerns on the horizon
• Digital Rights Management
• Anti-circumvention laws
• Protection for libraries

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Q A?