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Lecture 9:
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 pretransaction 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?