The very nature of commerce over the internet (“e-commerce” or “e-business” or “web-based business”) is that it is multi-jurisdictional. Once you have a website, you are engaging in possible activity in every nation in the world that has access to the internet…which is every nation in the world.
Typically, laws relating to commercial transactions and protecting consumers (and banning “improper sales”) are based on a state-by-state or national series of laws. Thus, pornography may be banned in commerce in Indiana and allowed in Sweden; alcoholic beverages are allowed to adults in most states but banned in most Moslem countries, etc. But the web blithely ignores such legislative restrictions and advertising, for services and products, or allowing for commerce, appears on every screen in every country. While nations can and do seek to limit what appears on the internet, the fact remains that such censoring is difficult and often results in the nation facing prohibition of various sites it very much wants to have online.
The problem is becoming more acute as more and more people use the internet to engage in both commercial and retail transactions. Amazon.com has become one of the largest retailers in the world and most people think it is inevitable that the Wal-Marts and Costcos will soon either have the bulk of their business on the web or will be supplanted by the Amazons of the future.
From a legal point of view the question becomes how a local or even national jurisdiction can regulate transactions that arise internationally or even involve several nations. The United States and the United Nations have sought to pass legislation to regulate much of the trade, which is briefly reviewed in this article, but enforcement of the provisions is difficult and, at some times, impossible.
A manufacturer of defective products in a former republic of the Soviet Union selling them through a Chinese website to Mexico can only be sued in their local court…and who will go to Khuzestan to enforce warranty requirements required by law in Mexico City?
Nevertheless, it is vital for both businesses and consumers to have a general idea of the basic law that exists and applies to transactions over the internet since the state can impose penalties and ban businesses that seek to engage in business ignoring the laws. And, as can be expected, developed countries can be effective and resolute in controlling entities within their borders who seek to use the internet for business.
The article below lists most of the various existing regulations and legal schemes that are encountered in the United States as to e-commerce. Various states and other nations may have different schemes…or no scheme at all. The wise business person will know the law and seek appropriate advice before launching into this type of business.
The reader should first read our article on Contracts and Commercial Transactions to get a general idea of the usual requirements for binding understandings between parties.
Laws that Specifically Govern E-Commerce
A number of new laws have been enacted that pertain specifically to the Internet. 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 or owner of software or intellectual property brings a civil action, it may be possible to obtain an injunction and monetary damages. The owner or 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 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 Act validates contracts executed by electronic signature and serves to protect consumers by requiring consumers to provide adequate consent to an electronic transaction. Since the law is Federal and thus can only apply to states under the interstate commerce provisions of the Constitution, the Act establishes the validity of certain transactions in or affecting interstate or foreign commerce only.
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. It would 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 a few 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 and it is not likely to provide much of a uniform solution.
The Uniform Electronic Transactions Act (UETA) was proposed for amendment of state commercial codes (UCCs) 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 47 states and the US Virgin Islands. Even if it is adopted in all 50 states, it will normally only govern transactions for procurement of goods, and not services or computer information.
Uniform Commercial Code (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 may be years before that recommendation is universally adopted and incorporated into state commercial codes but it is the inevitable trend.
Statute of Frauds and Enforceability of Internet Contracts
As discussed in our article on Contracts, certain agreements are not legally enforceable unless in writing. How does internet commerce confront that issue?
The law often requires 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 writings 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.
- The statute of frauds normally does not apply if it is possible under the terms of the agreement to perform the contract within one year. If no time for performance is specified in the oral agreement and the performance will not necessarily take more than one year, the statute of frauds would not apply.
- An agreement that cannot be performed within one year after the agreement is made must be in writing.
- Contracts involving the sale of land must be evidenced by a writing.
- Another type of contract that must be in writing is the promise to answer for the debt of another person (usually termed a guaranty.)
- A promise by the executor or administrator of an estate to use personal funds to pay a debt of the estate must be in writing.
- A promise made in consideration of marriage must be in writing. An example of this would be a prenuptial agreement.
- If a contract provides for the sale of goods with a price of $500.00 or more, it must ordinarily be in writing.
Various states have different variations of the Statute of Frauds, but the above criteria exist in almost every state.
It is not yet settled how the applicable law will be applied in the context of online agreements since there is no final guidance as to whether a purely electronic transaction constitutes 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 computer memory and not on paper. An argument can be made 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 akin to telegrams and telexes, both of which have been held to satisfy the writing requirement of the statute of frauds.
Execution Requirements for Contracts
An internet created contract must also meet the “execution” or “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. These facts may help to establish new law as to what binds a person to an internet contract, but the law remains far from established.
The 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 goods. Originally designed to address only software licenses, Article 2B has grown to include online licenses, subscription agreements, and other forms of electronic contracts. It is highly likely that the law allowing online signatures will be expanded. Clicking “I Agree” after reading easily read terms and conditions has been held to bind consumers in online transactions. Each State must adopt its own version of the UCC and that process is continuing at this time.
Other Acts that will provide some relief from the statute of frauds and which are discussed above are:
- The Electronic Signatures in Global and National Commerce Act;
- The Uniform Computer Information Transactions Act; and
- The Uniform Electronic Transactions Act.
The Legal Requirements for Creating a Website
There are few legal requirements imposed to create a Web page. The first act to perform is to 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 used 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. It also provides arbitration resources to resolve conflicts as to web names and domain names.
Once one secures the domain name registration, the process of starting an e-commerce business will be much the same as any other business enterprise. For example, one may want to use a limited liability entity. One will also need to enter into numerous contractual relationships in order to secure the services and products that are required to get the business up and running. One must pay close attention to any contracts that are required, as they may have significant results. Having a good CPA and legal advice is as necessary as hiring the right employees or picking the right name for the business.
One must also be aware of the issues surrounding intellectual property, including copyright, trademarks and patent rights. As an example of an issue not realized by neophytes to the industry, one question to pose 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 often 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. Care must be taken that such is the case for your Website for all outside software utilized. To start your site and have to remove critical portions due to a demand from a software company can set your business back by many months.
Licensing the business can also be required. Wherever you have an office, even if at home, 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 located. You must also undertake due diligence to see what requirements may be required where your customers are.
Definition of “Spamming” and its Legality
Spamming can take on many forms and is difficult to precisely define. Usually it is defined as 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 it is not yet held that this law applies to spamming.
Some states like California have gone further. Under legislation approved 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.
As in any new arena for business, laws are in flux and are likely to be clarified over the next few years. Given the international nature of web based business, even the start up business must be aware of legal requirements imposed on the local, State, Federal levels and, at times, international level. Ignorance of the law is no excuse.
Yet it is equally true that the internet has become the major method of engaging in business in the twenty-first century and even the smallest business requires a website to successfully portray its products or services. Having a working knowledge of the law and getting good advice is not only required, but must be updated from time to time as the law evolves.