Contracts and Transactions in E-Commerce: Module 1 of 5
Module 1: Contracts and Transactions in E-Commerce
The digital age has created numerous new commercial opportunities. Common business transactions can be accomplished with the click of a button, and agreements can be made and carried out entirely online. However, the technological changes that have revolutionized modern commerce also raise novel legal issues, particularly pertaining to the form and enforceability of contracts made and carried out electronically.
Contracts of Adhesion in Digital Commerce
The internet age has given rise to entirely new forms of contracts, as well as new ways that e-commerce companies and their customers trigger contractual liability. Online companies often manage this liability by publishing documents explaining the terms of the website. It is now a standard practice in e-commerce to require customers to abide by published “terms and conditions of use” or “terms of service” to conduct transactions on a site or sometimes even to browse it. These documents are used to explain what a website may and may not be used for, and customers are permitted to view and use the website upon the condition that they follow the published terms of service. Websites also commonly publish notices and disclosure documents required by consumer protection regulations.
This express disclaiming and limiting liability is an important way that e-commerce sites manage risk. However, whether they always stand up to a legal challenge is a different matter. Many of these contracts qualify as “contracts of adhesion,” meaning that the offeree (in this case, the website user) must either agree to or refuse all the offered terms. These contracts typically offer no bargaining power to the consumer, and as a result, courts tend to view them with increased judicial scrutiny.
So long as clickwrap agreements provide consumers with sufficient detail of the site’s terms and conditions, acceptance by click is considered valid, and these agreements are typically enforceable. Likewise, scrollwrap contracts also create legally-binding agreements so long as they are structured in a manner that requires clearly demonstrated assent by action. Although they qualify as contracts of adhesion, they meet the standards of notice and voluntary acceptance necessary to create binding agreements.
The field of e-commerce law is relatively new. However, over time, courts and regulatory agencies have developed recommended best practices and guidelines for e-commerce sites to ensure fair dealing in digital transactions. By following these guidelines, websites can help ensure that both their stakeholders and their customers are properly protected during their electronic dealings.
Even though the Federal Trade Commission rules on mandatory disclosures were first developed to apply to brick-and-mortar establishments, they apply to domestic transactions accomplished electronically as well. In 2000, following a public comment and rule making procedure, the FTC issued its “Dot Com Disclosures” guidance document. This policy statement clarified that the FTC’s rules and regulations promulgated under the Federal Trade Commission Act apply to virtual activities just as they do in the “real world.”
It is the website owner’s responsibility to understand which industry-specific agency rules apply to the online business. It is also the website owner’s responsibility to ensure that the customers are properly informed, so disclosures must be clear. If necessary, information should be repeated to ensure online consumers receive proper notice, and any website offering online purchasing options is responsible for making sure that customers are fully aware of their rights and obligations before they buy. The FTC does not distinguish between representations, warrantees, or advertisements made online or in print, so e-commerce companies must be able to demonstrate that all online claims are truthful, fair, and capable of being substantiated by objective evidence.
Models for e-Commerce Agreements
This uniform act was originally drafted in the late-1990s, and it aimed to create a uniform set of standards for information technology transactions that don’t fit squarely within the UCC’s rule regarding the sale of goods. Despite its potential usefulness, however, it was never widely adopted. Critics complained that it was too dense and confusing to be practical and that its limited scope and many loopholes made it possible for software companies to carry out questionable business practices. In response to these concerns, the American Law Institute drafted its own model law, the Principles of the Law of Software Contracts.
The Principles address four common legal issues in electronic contracting:
- The identification and nature of digital transactions,
- Contract formation and industry best practices,
- The application of federal intellectual property law and electronic contracting, and
- Specific issues of e-commerce law pertaining to warranties, remedies, and transfer.
Rather than following the codified structure of the UCC and original model statute, the Principles are designed like a Restatement, which is a series of rules written by experts as to what the law is in an area, rather than as a model code. They are meant to provide guidance to courts and lawmakers addressing issues common in electronic transactions, and they have proven to be a useful tool in the review of contracts in e-commerce.
For example, the Principles offer a test for determining whether an e-commerce business is dealing primarily in goods under Article 2 of the UCC or in software contracts that are more properly addressed by federal intellectual property laws. Known as the “predominant purpose test,” it looks at whether the predominant factor, thrust, and purpose of the contract, reasonably stated, is the rendition of a service, with goods only incidentally involved, or is a transaction of sale, with labor incidentally involved.
In addition to providing an authoritative source on the proper nature and scope of electronic contracts, the Principles address the procedures for the formation of these agreements. The formation rules for electronic agreements and software licenses are broad, allowing for the creation of enforceable agreements by any methods the parties choose. The Principles also allow for so-called “rolling contacts” in which customers agree to different terms at different times.
For example, Hill v. Gateway 2000 involved a customer who purchased a computer over the phone. When the computer arrived, the box included Terms of Service that included a 30-day satisfaction warranty. The plaintiff became unsatisfied after the warranty period had elapsed and sued for the return of his money, arguing that the 30-day warranty should be an unenforceable supplemental term that was added after the contract for sale was formed over the phone. The court disagreed, finding that the parties had a rolling contract to which the customer assented, first over the phone and then again - to the supplemental terms - when he opened the box and kept the product beyond the thirty day period.
Filling Gaps and Interpreting Electronic Agreements
Like the UCC, the Principles offer helpful “gap-fillers” and “battle of the forms” provisions. They apply the standards for physical records found in UCC § 2-207 (applicable when terms of the acceptance vary from those of the offer) to electronic records, but provide special rules for cases where software or other protected electronic property is transferred to a third party. These clarifications are particularly significant in electronic contracts, as in the past, third-party transferees have argued that they cannot be bound to the terms of service agreed to by the original purchaser.
Regarding interpretation of electronic agreements, the Principles provide an objective interpretation rule that instructs courts to begin with the language of the agreement. If the agreement does not address the issue under dispute, courts should then consider the parties’ actions during their performance under this contract and/or their prior course of dealing. If the agreement of the parties is still not clear, a court may look to applicable trade practices in the industry. If the parties to a digital contract disagree over the meaning behind specific words or conduct or the agreement is ambiguous regarding a fundamental term, courts can consider evidence of the parties’ subjective knowledge and intent at the time the agreement was made.
Finally, the Principles clarify the standards of performance for software contracts, including what qualifies as a breach of the agreement and the remedies available in the event of breach. It defines breach as a party failing to perform as promised without legal excuse. This definition is consistent with UCC Article 2 and the common law, but it also includes key clarifications regarding agency and warranty issues that commonly arise in digital transactions. In determining whether a breach is material, thus warranting cancellation of the contract, the Principles outline six factors in determining materiality. Examples include a supplier’s failure to disclose a material defect and the contracts’ failure to perform its essential purpose. Additionally, the rule stipulates that providers of software that provides electronic services cannot program the software to disable itself automatically unless the customer has actual or effective notice of this possibility.
Digital Signatures and Electronic Records
Modern technology has altered the landscape of traditional contract law, and state and federal lawmakers have responded in turn. Nearly every state has enacted the Uniform Electronic Transactions Act, which sets forth the requirements for validating digital records and signatures on electronic agreements. The Act was drafted in 1999 to remove unnecessary legal barriers to the growing field of e-commerce. It establishes the forms and types of electronic records and signatures that are considered equivalent to signed paper agreements.
The Electronic Signatures in Global and National Commerce Act (often referred to as “E-Sign”) is the federal counterpart to the Uniform Electronic Transactions Act. This federal law officially legitimizes electronic records and e-signatures and prohibits courts from denying enforcement of a contract solely because the parties executed it electronically. E-Sign also lays out the ground rules for validating the authenticity of electronic signatures and ensuring that digital agreements are not improperly modified. First, E-Sign requires that the customer consent to engage in electronic communications or they must be sent on paper. Further, a customer may demand an electronic record to be produced on paper or by other means and may withdraw his or her consent for electronic communications at any time. Withdrawing consent, of course, does not negate already agreed-to terms, but it does prevent future binding electronic agreements.
Together, these laws establish the legal legitimacy of electronic signatures, communications, and records in digital transactions. Because most states had already adopted the Uniform Electronic Transactions Act by the time Congress enacted E-Sign, the federal legislature decided to include a provision that, where they conflict, the federal law typically defers to the uniform act’s substantive requirements.
Over the past decades, e-commerce has developed from an emerging industry to a regular part of our daily lives. Most of us purchase goods and services, post media, perform financial transactions, review proprietary information, and perform other important activities online on a regular basis. Fortunately, as electronic transactions have become more common, the law of digital commerce has developed solutions to some of the new issues raised by the internet age.
Despite the novelty of many electronic transactions, courts and legal scholars have worked out a relatively straightforward standard for review of contracts common in software and information technology transactions. Likewise, state and federal lawmakers have developed statutes setting forth requirements for validity and authenticity of electronic agreements and consumer protection agencies have created guidelines for mandatory disclosures and other best practices for fair dealing. These legal protections create a robust framework that helps to make sure e-commerce customers and businesses are protected in their daily activities.
In our next module, we will turn to privacy protections that are so important to online activities and transactions.
Edwin W. Patterson, “The Interpretation and Construction of Contracts,” 64 Colum. L. Rev. 833, 855-57 (1964)
Vault Corp. v. Quaid Software Ltd., 655 F. Supp. 750, 761 (E.D. La. 1987), aff’d, 847 F.2d 255 (5th Cir. 1988). Shrinkwrap agreements are most commonly forms of license, which is addressed in the section of this course dealing with intellectual property.
What is a Shrink Wrap Agreement?, Legal Match, .
Berkson v. Gogo LLC, 2015 WL 1600755 at *16 (E.D.N.Y. April 8, 2015).
Alison S. Brehm & Cathy D. Lee, “From the Chair: ‘Click Here to Accept the Terms of Service,’” American Bar Association, (Jan. 2015), https://www.americanbar.org/publications/communications_lawyer/2015/january/click_here.html.
Berkson, 2015 WL 1600755 at *26; see also Feldman v. Google, Inc., 513 F. Supp. 2d 229, 236 (E.D. Pa. 2007); I. Lan Sys., Inc. v. Netscout Serv. Level Corp., 183 F. Supp. 2d 328, 336-38 (D. Mass. 2002).
See Barnett v. Network Sols., Inc., 38 S.W.3d 200, 203-04 (Tex. 2001).
See In re Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 1058, 1064-66 (D. Nev. 2012).
See Van Tassell v. United Mktg. Group, LLC, 795 F. Supp. 2d 770, 790 (N.D. Ill. 2011).
See Sw. Airlines Co. v. BoardFirst,LLC, No. 3:06-CV-0891-B, 2007 WL 4823761, at *5 (N.D. Tex. Sept. 12, 2007); see also Hines v. Overstock.com, Inc., 668 F. Supp 2d 362, 366-67 (E.D.N.Y. 2009).
The Federal Trade Commission brought its first internet fraud case against a web-based company in 1994. Federal Trade Commission, The FTC’s First Five Years Protecting Consumers Online, Executive Summary (Dec. 1999) https://www.ftc.gov/sites/default/files/documents/reports/protecting-consumers-online/fiveyearreport.pdf.
15 U.S.C. §§ 41-58; Federal Trade Commission, .com Disclosures: How To Make Effective Disclosures in Digital Advertising, 1-2 (March 2013), https://www.ftc.gov/system/files/documents/plain-language/bus41-dot-com-disclosures-information-about-online-advertising.pdf.
Federal Trade Commission, .com Disclosures: How To Make Effective Disclosures in Digital Advertising, 6-9 (March 2013), https://www.ftc.gov/system/files/documents/plain-language/bus41-dot-com-disclosures-information-about-online-advertising.pdf.
Id. at 10-14.
Id. at 2-4.
Id. The Commission issues industry-specific rules when it has reason to believe that unfair or deceptive practices are prevalent in such industry. 15 U.S.C. § 57a(a)(1)(B). As a result, over time the FTC has generated entire fields of consumer protection law that apply to transactions in nearly every commercial field.
Id. at 7. See also id. at 4 (citing FTC Policy Statement on Deception, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, www.ftc.gov/bcp/policystmt/ad-decept.htm; FTC Policy Statement on Advertising Substantiation, appended to Thompson Medical Co., 104 F.T.C. 648, 839 (1984), aff’d, 791 F.2d 189 (D.C. Cir. 1986), www.ftc.gov/bcp/guides/ad3subst.htm.
16 C.F.R. § 435.2(a); 16 C.F.R. § 255.0(b).
Hans Anderson, Jeff Raymakers, & Jonathan Reichenthal, “The Uniform Computer Information Transaction Act: Ethical Issues in Software Contract Law, What is UCITA?,” (March 2001) https://cs.stanford.edu/people/eroberts/cs181/projects/2000-01/ucita/index.html; see also I. Lan Sys., Inc. v. Netscout Serv. Level Corp., 183 F. Supp. 2d 328, 332 (D. Mass. 2002) (discussing challenges courts and legal scholars face keeping up with the pace of technological change).
National Conference of Commissioners on Uniform State Laws, Uniform Computer Information Transactions Act (July 23-30, 1999), http://www.uniformlaws.org/shared/docs/computer_information_transactions/citaam99.pdf.
Hans Anderson, Jeff Raymakers, & Jonathan Reichenthal, “The Uniform Computer Information Transaction Act: Ethical Issues in Software Contract Law, Controversy,” (March 2001) https://cs.stanford.edu/people/eroberts/cs181/projects/2000-01/ucita/controversy.html.
Hans Anderson, Jeff Raymakers, & Jonathan Reichenthal, “The Uniform Computer Information Transaction Act: Ethical Issues in Software Contract Law, The History of UCITA,” (March 2001) https://cs.stanford.edu/people/eroberts/cs181/projects/2000-01/ucita/history.html.
Am. Law Inst., Principles Of The Law Of Software Contracts (2010) [hereinafter Ali Principles].
Hillman, Robert A. and O'Rourke, Maureen, "Principles of the Law of Software Contracts: Some Highlights," Cornell Law Faculty Publications,” 1519, 1522 (2010), http://scholarship.law.cornell.edu/facpub/192.
Ali Principles § 1.07 (“predominant purpose test”).
Ali Principles § 2.01.
Hillman, Robert A., "Rolling Contracts," Cornell Law Faculty Publications, 743, 744 (2002), https://scholarship.law.cornell.edu/facpub/549.
See Hill v. Gateway 2000 Inc., 105 F.3d 1147, 1148 (7th Cir.), cert denied, 522 U.S. 808 (1997).
“Battle of the forms” occurs when parties to an agreement have documentation showing different terms to a contract, and courts must determine whether there is a binding agreement and, if so, what are the terms of the contract. See generally Giesela Rühl, Battle of the Forms: Comparative and Economic Observations, 24 U. Pa. J. Int’l. Econ. L. 189, 189-190 (2003).
Ali Principles § 2.02.
See, e.g., Vernor v. Autodesk, Inc., 621 F.3d 1102 (9th Cir. 2010).
Ali Principles § 3.09(a).
Id. at § 3.10.
Id. at § 3.11; see also U.C.C. § 2-703.
See id. (defining material breach); id. at § 3.05(b) (duty to disclose hidden defects); id. at § 4.01 (limited remedies for failure of essential purposes), and id. at § 4.03 (breach by a transferor).
Ali Principles §§ 3.11(c); 4.03.
Id. at § 4.03 cmt b.
National Conference of Commissioners on Uniform State Laws, Uniform Electronic Transactions Act (1999), http://www.uniformlaws.org/shared/docs/electronic%20transactions/ueta_final_99.pdf. Note that the UETA does not alter the substantive requirements for contract formation, which remain consistent regardless of whether agreements are made by oral, written, or electronic means.
Uniform Law Commission, “Legislative Fact Sheet – Electronic Transactions Act,”http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Electronic%20Transactions%20Act.
Electronic Signatures in Global and National Commerce Act, Pub. L. 106-229, 114 Stat. 474 (June 30, 2000) (codified at 15 U.S.C. ch. 96).
15 U.S.C. § 7001.
15 U.S.C. §§ 7006, 7021.
15 U.S.C. § 7001.
15 U.S.C. § 7002.