Lecture 11:Commercial Transactions

Mary Jo Dively, Vice President and General Counsel

Carnegie Mellon University

What’s 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)

Sales vs. Licenses

• Sales:– Buyer receives title to goods– Little or no continuing relationship between buyer

and seller– Terms of transaction flow from these principles—

delivery, 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

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)

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

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)

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

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 contracting—its provisions do not work mechanically for most information products which are licensed

What is NCCUSL?

• Non profit body of approx. 350 lawyers, divided equally among private practitioners, law professors and judges

• Responsible for sophisticated uniform legislation—UCC Article 2 for example

• Drafting Process• States individually consider each

uniform law

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

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.

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

UETA, continued

• The rest of UETA’s 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

electronically—no one can be forced to do so

– Delivery– Attribution

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

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

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

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

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

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

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

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

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 recipient’s designated information processing system)

• Codifies existing case law of shrinkwrap/clickwrap contracts

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 notices—

important provision for free software

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

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 confidentiality—i.e. trade secrets, non-disclosure, etc.

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.

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

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.

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.

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

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 licensee’s purpose, system

integration

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

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

UCITA’s 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 subject—similar to what happened with UETA and E-Sign

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

Q & A?