A PRIMER ON THE BASIC LAW OF E-COMMERCE
Some changes in technology are obvious and some are overwhelming. The recent synthesis of hand held computers which are contained in our mobile telephones and availability of information and secure shopping locales on the various internet websites have changed the world we live in forever. Doubt that? Try to find a phone booth. Try to buy a map of the town you live in. And those owners of “brick and mortar” stores are fully aware that their businesses are often in survival mode as they try to counter the ease and low prices available by shopping and buying on the internet. The largest internet retailer, Amazon.com, has become the giant of commerce with its “one click” method of purchase which allows one to buy almost anything with a single click without commuting to a store, paying for gas and parking and allowing one to avoid the crowds.
Websites exist that allow you to inspect any item, to receive reviews from hundreds or thousands of other users, and to compare prices worldwide. Free shipping and lack of sales tax are common and as traffic becomes more difficult in more cities, the trend is for buying more articles more of the time on line.
But such internet commerce extends beyond retail. Wholesalers and commercial transactions have relied increasingly on the internet for investigating sources of goods and personnel, purchasing same, contracting for service and follow up. The law, which is slower than business usually, is catching up and now allows binding commitments to be achieved on line involving millions of dollars and crossing state and, indeed, national borders.
The last massive change in buying and selling equivalent to the one of the last five years was the introduction of the credit card as a major method of purchase over forty years ago. As with credit cards, the wise buyer will take the time to understand the basic legal realities that the new world of e commerce entails. This article will provide a basic outline and other articles on this website expand this analysis.
The Legal Universe for Commerce on the Internet:
The term e-commerce or e-business basically means doing business on the Internet. The laws regulating the Internet and doing business online are still evolving rapidly and can be expected to continue that process.
One unique aspect of the internet is that it is immediately international in scope. If you place an advertisement on your website you are advertising in Bangladesh, Moscow and India that same day. If you are selling wine, you are violating the local law of Saudi Arabia and Yemen. If you are selling fire arms you are violating the law of most of Europe, all of Asia, and most of South America. The various jurisdictions have yet to work out fully what law applies to the various websites, but the essential themes are the law applies where the entity is located and at times where the business is consummated. Thus, your website offering to sell wine is legal in the United States, illegal in Saudi Arabia, but unless you ship to Saudi Arabia, their law should have no effect on you. However, if you were physically located in Saudi Arabia, selling wine to Europe, you would find yourself in violation of the law.
In the United States, a number of laws have been enacted dealing with internet commerce. For example, federal laws such as the Digital Millennium Copyright Act provide stiff civil and criminal penalties for pirating and other unauthorized use of software. If a licensor brings a civil action against you, for example, it may be possible to obtain an injunction and monetary damages. The licensor may then choose between actual damages, which includes the amount lost because of infringement, plus any profits attributable to the infringement. In addition, the government can criminally prosecute you for copyright infringement. If convicted, penalties can include up to five years in prison and a fine of up to $500,000. Second-time offenders risk 10 years of prison and a $1,000,000 fine.
Many of the transactions conducted online relate to the sale or lease of consumer goods. State and federal consumer protection laws (e.g., Magnuson-Moss Warranty Act) govern these transactions, which regulate advertising, warranties, and disclaimers. These laws also provide consumers with remedies not normally available under common law or the Uniform Commercial Code (UCC). In addition to general consumer protection laws, many states have adopted or are in the process of adopting specific laws directed at electronic transactions to protect consumers.
The Electronic Signatures in Global and National Commerce Actvalidates contracts executed by electronic signature and serves to protect consumers by requiring consumers to provide adequate consent to an electronic transaction. The Act establishes the validity of certain transactions in or affecting interstate or foreign commerce. Specifically, it provides that a signature, contract, or other record relating to such transactions may not be denied legal effect, validity or enforceability solely because it is in electronic form. A contract relating to interstate or foreign transactions may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation. The Act defines an electronic record as a contract or other record created, generated, sent, communicated, received, or stored by electronic means. An electronic signature means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed by or adopted with the intent to sign the record. However, this act only applies to interstate and international commerce. It would therefore only affect transactions between buyers & sellers in different states, or in different countries.
The Uniform Computer Information Transactions Act (UCITA) was proposed for state adoption to eliminate the requirement for tangible writings and signatures in the purchase of “computer information”. Unfortunately, only about two states have actually enacted a version of this proposed act. Most state legislatures are not expected to create or adopt a version of that law. It is not likely to provide a uniform solution.
The Uniform Electronic Transactions Act (UETA) was proposed for amendment of state commercial codes to eliminate the requirement for tangible writings and signatures in the purchase and sale of “goods”. Some version of this legislation has been adopted in forty seven states and the US Virgin Islands. Even if it is adopted in all fifty states, it will only govern transactions for procurement of goods, and not services or computer information.
UCC Article 2B revisions, as proposed for adoption by National Conference of Commissioners for Uniform State Law, would change some of the requirements for a writing and a signature. Contracts formed electronically would therefore be enforceable. It will be years before that recommendation is universally adopted and incorporated into state commercial codes.
For a more thorough discussion of these laws, read our article Laws Pertaining to Commerce on the Internet.
The Need for a Writing to Make a Contract:
The law often does require that certain contracts must be in writing in order to be enforceable by a Court. The state statutes that require certain contracts to be in writing are called statutes of fraud. Statutes of fraud require that either the contract itself be in writing and signed by both parties or there must be a sufficient memorandum of the agreement signed by the party being sued for breach of contract.
State laws control the statute of frauds in the United States unless interstate commerce is at issue in which case Federal law can apply. The usual basics of the law, as discussed in our article on statute of frauds is as follows:
It is uncertain how the applicable law will be applied in the context of online agreements since there is no clear guidance as to whether a purely electronic transaction will constitute a writing for purposes of the statute of frauds. Part of the uncertainty is attributable to the definition of writing contained in the UCC. Writing includes printing, typewriting, or any other intentional reduction to tangible form. The UCC’s definition did not contemplate a technology in which data is stored in a computer memory and not on paper. Arguments have been advanced that data stored in computer memory is not considered sufficiently tangible to satisfy the statute of frauds. However, the data can be printed at any time. If storage in a computer’s memory is not sufficiently tangible, the electronic information can be produced in tangible form by simply printing it. In addition, electronic transactions are really no different than telegrams and telexes, both of which have been held to satisfy the writing requirement of the statute of frauds.
The trend and the increasing practice is for the jurisdictions to allow transactions that would otherwise violate the statute of frauds to be enforceable if the correct type of information is agreed upon digitally with the party bound being fully advised of that binding effect and taking some actions to indicate consent, such as clicking a button that so indicates. See our article on Web Trading Partner Agreements.
Note that once it has met the standards for a writing, the online agreement must meet the subscription requirement. The subscription (signature) requirement of the statute of frauds can be satisfied by a single writing or by a series of writings. For purposes of the statute, if one of a series of papers relating to the same matter is signed by the party to be charged, that is sufficient, as all the papers are to be considered together in evidencing one contract or memorandum. The UCC has no formal requirements for a signature, only that it appears for the purpose to authenticate the writing. Instead of a name, the signature arguably can be an initial or a symbol.
If an e-mail is sent, the sender identification in the header of an e-mail will be sufficient to show authentication. However, will use of the individual’s initials or name at the end of the message satisfy the signature requirement? E-mail software can create a signature that includes name, job title, and phone number. Further, a click on “accept” has been used to create binding agreements in an increasing number of on line transactions.
Proposed Article 2B of the Uniform Commercial Code will likely resolve many of the issues surrounding the statute of frauds in online contracts regarding the sale of good. Originally designed to address only software licenses, Article 2B has grown to include online licenses, subscription agreements, and other forms of electronic contracts.
Federal Courts have recent law that allows filing of pleadings which are “signed” by the attorney or party on line and it cannot be doubted that so long as full disclosure is made as to the binding effect of such digital signatures is made and an affirmative act is required of the “signer” that the law will impose obligations based on such signature.
Legal Requirements for Creating a Web Page.
There are remarkably few legal requirements in creating a Web page. One must secure the rights to use the domain name that you choose. This requires registering the name with a domain administrator. There are a number of domain name registration services around the world. The one selected should be accredited by the Internet Corporation for Assigned Names and Numbers (“ICANN“). ICANN is a nonprofit corporation that has been delegated responsibility by the United States government to coordinate Internet technical functions, including management of the Internet domain name system. Disputes as to rights to domain names are usually resolved by their arbitration procedure.
Once you are able to secure domain name registration, the process of starting an e-commerce business will be much the same as any other business enterprise. See our article on business startups while protecting your assets. Typically, it is wise to incorporate your business. You will also need to enter into numerous contractual relationships in order to secure the services and products that are required to get the business in operation. Obtaining a good CPA and good attorney is wise and getting advice from those previously in the business even wiser.
It is increasingly important to consider intellectual property rights such as trade names, copyrights, logos. In today’s business world, intellectual property is often the most valuable asset a business can maintain and if your intellectual property is on your website it is vital to have appropriate copyright protection.
One question to ask yourself, for example, is whether or not it is appropriate to incorporate source code into your Web site that you have taken from a commercial software company. It is oftentimes contemplated by a software license that the user is allowed to reproduce and distribute a software product as part of its own product, provided that usage is adding significant and primary value to the underlying software, along with numerous other limitations and restrictions.
Even when engaging in e commerce within your home office, the issue of a business license and local taxes for operating a business must be considered. Licensing your business can be problematic. Wherever you have a home office, it is almost a certainty that you will need to obtain a business license. There may be other requirements in the locale where you are physically located. You must also undertake due diligence to see what requirements may be on the other end where your customers are located. This is sometimes called part of the “fulfillment” process, which could be exceedingly complex depending upon the nature of your business and where your customers are located. If you are operating in California but ninety percent of your customers are in Texas due to the nature of your product, it is vital to determine Texas law on the possible taxes you will confront.
Once your business is up and operating, compliance issues are ongoing. A business activity that is illegal in one medium is not going to become legal simply because you are doing it over the Internet. Given the lack of restrictions in accessing and using the Internet, it is also sometimes easier to fall into traps for the unwary. Examples would include posting unauthorized materials on a Web site, infringing upon intellectual property rights, or engaging in unlawful solicitations (for example, spamming). With so many jurisdictions involved and the relative anonymity of other people on the web, dishonesty can be a constant danger. Checking out the business associates and customers may be a vital task that one must consider before concluding transactions. Cash (credit card) payments being required are clearly the way to avoid many of the dangers. Further, there are more software solutions available to web businesses to assure payment and to obtain background information on others using the web site. Mastery of those tools is essential for a successful e commerce business.
The Legality of “Spamming.”
Spamming can take on many forms and is difficult to precisely define. Generally speaking, it consists of mass posting or cross-posting of unsolicited e-mail for commercial purposes. Under federal law, it is unlawful to send junk mail by facsimile, with the possibility of civil liability of up to $500 per copy. Efforts have been made to extend this law to spam sent over the Internet, but the law is still in flux. It can be expected that restrictions on spamming may become part of Federal law in the immediate future.
California has already enacted anti spamming legislation. Under legislation passed in September 1998, unsolicited commercial e-mail messages must include opt-out instructions and contact information. An opt-out request must also be honored. Certain messages must also be identified in their subject lines as being advertisements. A service provider may also sue a sender of unsolicited commercial e-mail for violating the provider’s policies if the sender has actual notice of such policies and if the spam is sent out through the provider’s facilities located in California. Other states make it illegal to provide falsified routing information. Legal advice is necessary before beginning any mass e mail campaign.
The Future of E Commerce
In some respects, e commerce has taken over much of retail business already. A company without a website has little credibility to most of the public even if its sales are not performed on line. A website today is what a phone number was twenty years ago….as necessary to establish presence as a store front. E commerce simply moves the use of a web site only to demonstrate to the public your identity to the creation of a website that can fill orders. It allows a company to consider eliminating all brick and mortar locations or to combine those locations with a strong e commerce presences. Best Buy is a good example of a previously off line company that closed half its stores to increase on line sales. It simply could not compete with companies whose overhead was so much lower by avoiding the large cost of premises, employees, etc.
Some types of businesses will only use the web e commerce in a limited way, but it is surprising how widespread the use becomes. Even restaurants now go beyond taking reservations to having orders placed on line for takeout or preparation. With hand held computers now everywhere, the website must not only be computer friendly, but small screen friendly.
To ignore these business facts of life is akin to a business in 1880 refusing to have a telephone because they did not need to do that before. Business is always in the forefront of change and e commerce demonstrates that.
But to enter that world without proper preparation, training and advice is a dangerous step. First learn. Then prepare. Then begin your business.
These Articles are to give the reader a general description of certain areas of the law. Legal advice is necessary to apply these legal concepts to your particular situation. The Reader should obtain competent legal advice before relying on the Articles.
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