Online Contracting

by Rob Hassett

This article was prepared for the seminar on Advanced Internet and Computer Law sponsored by the National Business Institute scheduled for October 29, 1998 in Atlanta. This advanced level and lengthy article addresses legal issues relating to online contracting. (43 pages)

ACKNOWLEDGEMENTS

The writer wishes to thank Robert Port, who is of counsel to the writer’s law firm, for his help in preparing this section of these materials.

I. INTRODUCTION

Online contracting takes place over the Internet, over online services such as America Online and through private networks such as has traditionally been the case with electronic data interchange.(1) Online contracting can be broken down into four (4) categories:

(1)  The online ordering of software, books, parts and other products with shipment by common carrier;

(2)  The online ordering of digitally formatted products such as computer software and sound recordings followed by transmission of the products to the customer;

(3)  The online ordering of, followed by access to, databases, encyclopedias and other similar services; and

(4)  Any other agreements which are negotiated or confirmed online, including real estate purchases, development agreements and joint venture agreements.

The law governing online contracting is unsettled. Model acts have been proposed to clarify that law and to conform it to current commercial practices.

The subject of online contracting is addressed in this article as follows:

Section II – current and proposed laws;

Section III – requirements for a binding agreement;

Section IV – determination of terms included in any agreement

Section V – requirement that agreement be in writing and/or signed and satisfaction of those requirements; and

Section VI – applicability of implied warranties.

II.  LAW APPLICABLE

A. Current Law.

In determining what body of law governs an online transaction, the first question is whether or not the transaction is governed by Article 2 of the Uniform Commercial Code (UCC). The UCC has been adopted in every state other than Louisiana.(2) Different rules apply to transactions governed by the UCC than to those outside its scope. Differences include whether or not the parties are required to agree to all of the essential terms of the agreement in order to have a binding contract, the circumstances under which the contract is required to be in writing and what, if any, implied warranties are applicable.

Article 2 is entitled “sales” and expressly covers “transactions in goods.”(3) Determining whether some transactions are covered is easy. An online agreement for the providing of services is not governed by Article 2, whereas an online contract for the sale of hardware is governed by Article 2.

What if the transaction involves the providing of both goods and services? Most courts that have addressed the issue, including the Georgia courts, apply the “predominant nature” test. Applying this test, the courts determine whether the transaction predominantly involves goods or services. If it predominantly involves a sale of goods, Article 2 applies. If services are the predominant feature of the transaction, traditional common law rules on contract interpretation govern.(4)

What about an online contract for a license for computer software? Must the transaction be a “sale” to be governed by Article 2 or is any “transaction” covered? There is no definition of “transaction” in the Uniform Commercial Code. The Uniform Commercial Code defines “goods” in pertinent part as follows:

“Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities …. and things in action.(5)

Most courts that have decided the issue have held that licenses of computer software are governed by Article 2.(6) A few courts have held to the contrary.(7)

Another question is how to treat computer software, movies and music that are ordered and transmitted online. If these products were placed on a compact disk, CD ROM or tape and shipped, they would be subject to Article 2. However, when downloaded from a web site, the answer is not clear. The writer was not able to find any case on point. There are a few cases that are somewhat analogous. An Ohio court held that the sale of metered amounts of electricity was governed by Article 2.(8) A Pennsylvania court held that the supplying of water was governed by Article 2.(9)

On the other hand, a New York court held that electricity is not governed by Article 2.(10) A Pennsylvania court held that the providing of cable television programming was not governed by Article 2.(11)

Interestingly, the United States Patent & Trademark Office views a mark associated with software transmitted over the Internet as a service mark rather than a trademark. This supports the argument that products delivered by online transmission are outside Article 2. In spite of this, the writer believes that applying current law most courts would hold that such transactions were governed by Article 2. The reason is that whether transmitted or shipped, these products are still moveable and therefore constitute goods and there is no reason to apply different rules to products that provide the same function because of the manner in which they are delivered.

What law applies to the online accessing of databases and other information? Again, there are no cases directly on point. The only somewhat analogous case is one in which an Illinois court held that demographic information and mailing lists provided to a publisher of a magazine would be covered by Article 2.(12) The writer believes that most courts would not apply Article 2 to these transactions simply because accessing information from databases is just too far removed from the definition of “goods.” It does not create an inconsistency to treat accessing of databases differently from the purchase of goods as the purposes are completely different.

There is one other Georgia Act that applies. The Georgia Electronics Records and Signatures Act was enacted in 1997. This Act defines “an electronic signature” and a “record” and provides for when an “electronic signature” and/or a “record” can substitute for a signature and/or a writing.(13)

B. Proposed New Laws.

1.  Introduction. There are two model codes currently subject to review and revision which will, in some form, eventually be recommended for adoption by the states. Each would have a major impact on online contracting. One is proposed Article 2B to the UCC. The other is the Electronic Transactions Act. The scope and purpose of each are discussed below. The impact on various issues important to online contracting are discussed in later sections.

2.  Article 2B. The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) are responsible for overseeing updates to the Uniform Commercial Code. In 1995 a committee was formed to draft a separate UCC article to specifically address software licensing and electronic commerce. Various versions have been proposed and debated. The goal is to propose a version that most, if not all, of the state legislatures will adopt. The latest version was reported on August 1, 1998, which is the version referred to in this paper.(14)

Section 2B-103 of proposed Article 2B governs the scope of the Article and reads in pertinent part:

Except as otherwise provided in Section 2B-104 on excluded transactions and in subsection (b), this article applies to:

(1)  Any transaction that creates a software contract, access contract, or license; and

(2)  Any agreement to provide support for, maintain, or modify information related to a contract within the scope of this article.

Section 2B-102 of Article 2B provides the following definitions important to Section 2B-103:

(1)  “Access contract” means a contract to electronically obtain access to, or information in electronic form from, an information processing system. ….

(24) “Information” means data, text, images, sounds, mask works, or works of authorship. (Regarding this definition, the reporter’s notes show that “works of authorship” is based on the definition set forth in Section 102 of the Copyright Act.(15) Copyright law protects work of authorship which include literary works, musical works (i.e., songs), pictorial and graphic works, motion pictures and other audiovisual works and sound recordings. Literary works have been defined to include computer programs.)

(44)  “Software” means a computer program, any informational content included in the program, and any supporting information provided by licensor as a part of an agreement.

(28) “License” means a contract that authorizes access to or use of information or of informational rights and expressly limits the contractual rights or permissions granted … “License” includes an access contract …

(27) “Informational rights” include all rights and information created under laws governing, patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that permits a person, independently of contract, to control or preclude another person’s use of the information on the basis of the right holder’s interest in the information.

(25) “Information processing system” means an electronic system or facility for generating, sending, receiving, storing, displaying, or processing electronic information.

Section 2B-104 of Article 2B sets forth transactions excluded from the Article, providing in pertinent part:

This article does not apply to the extent that a transaction:

….

(8)  is a license of a linear motion picture or sound recording or of information to be included therein, except in connection with providing access to such motion picture or sound recording under an access contract covered by this article.

With respect to online transactions, to the extent Article 2B is enacted as currently configured:

(1)  The online purchase of goods (other than computer software) followed by the shipment of the goods by common carrier would not be covered;

(2)  The online placement of an order for computer software followed by a shipment or transmission of that computer software would be covered;

(3)  The online ordering of audio recordings and videos would not be covered when recorded on CD ROM or by other media and shipped by common carrier;

(4)  The online ordering of audio recordings and videos followed by transmission appears to be covered as it would be a “contract to electronically obtain …. Information” and is therefore an “access contract;”

(5)  The online ordering and transmission of any interactive media products and any licensing of interactive media products would be covered; and

(6)  The online ordering and obtaining of information over private lines, through access to web sites, through email or in any other online manner would be covered.

2. Uniform Electronic Transactions Act. In 1996 the NCCUSL approved a Drafting Committee to “draft an act consistent with but not duplicative of the Uniform Commercial Code, relating to the use of electronic communications and records in contractual transactions.”(16) The proposed Act is entitled the “Electronic Transactions Act” (ETA).

Under Section 103, the scope of the ETA would be as follows:

Except as otherwise provided in Section 104, this Act applies to electronic records and electronic signatures that relate to any transaction.

Section 104(b) provides that any transaction subject to the ETA that is also subject to the UCC or any other applicable law is to be construed consistent with that other substantive law and, where such construction is unreasonable, that the UCC or other substantive law will control.

III. WHAT CONSTITUTES AN AGREEMENT?

A. Current Law.

1.  General Law. Under common law there is no agreement, even where the parties agree that there is an agreement, unless the parties have agreed to all of the terms. Georgia has adopted this principal in O.C.G.A. §13-3-1 as follows:

Essentials of Contracts Generally.

To constitute a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contract can operate. Any acceptance of an offer must be unconditional, unequivocal, and without variance of any sort.(17)

O.C.G.A. §13-3-2 reiterates the above as follows:

Contract incomplete without assent of parties to terms thereof; withdrawal of bid or proposition by party

The consent of the parties being essential to a contract, until each has assented to all the terms, there is no binding contract; until assented to, each party may withdraw his bid or proposition.

2.  Article of the Uniform Commerical Code. With regard to transactions and goods covered under the scope of Article 2 of the UCC, assent to all of the terms is not required for the parties to be bound by a contract. All that is required is that the parties agree, either expressly or by their conduct, that they have an agreement and agree to the quantity of goods being purchased. Section 204 of Article 2 of the UCC reads in pertinent part:

Formation in General

(1)  A contract for 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)  An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3)  Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

B.  Proposed Laws.

1.  Article 2 B.

The currently proposed version of Section 2B – 202 is composed of five provisions, three of which are the same as the three provisions of Section 204 of Article 2 except that the first provision of Article 2B Section 202 expressly provides that a contract may be formed by the “operations of electronic agents which recognize the existence of a contract.” Section 2B – 202 goes further to provide:

(d) In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including scope.

The reporter’s note to this section states that the addition of (d) emphasizes that if there is a material disagreement about a material term, and the parties’ conduct does not indicate otherwise, there is no agreement. It is likely that if there was a material disagreement about a material term in a licensing transaction, it would involve the scope of the license and make it impossible to determine a remedy. A court construing a license under Article 2 would likely treat a disagreement about the scope of a license in the same way as Article 2 treats a disagreement about quantity — determine that there was insufficient information to fashion a remedy and therefore that there was no enforceable licensing agreement.

IV. WHAT TERMS ARE INCLUDED IN AGREEMENT?

A.  Current Law.

1.  General Law. Inasmuch as outside the UCC the parties must agree to all material terms of the agreement in order to have an agreement, if the agreement is enforceable, all the material terms have been agreed upon. These are the terms included in the agreement.

2.  Article 2. Under Article 2 of the UCC, the parties have a contract whenever they agree they have a contract or their conduct indicates that they have a contract. This is true even if they have not agreed to all the terms, provided they have agreed to sufficient terms for the court to fashion a remedy, i.e., the quantity of the goods involved. So what happens when the forms sent by each of the parties, or the parties’ conduct, show that the parties have agreed that they have a contract and agree on the quantity of goods to be purchased but have a conflict about the other terms? This is answered by Section 2-207 of the UCC. That section reads as follows:

Additional terms in acceptance or confirmation.

(1)  A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2)  The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless,

(a)  The offer expressly limits acceptance to the terms of the offer;

(b)  They materially alter it; or

(c)  Notification of objection to them has already been given or is given within a reasonable time after notice of the additional terms is received.

(3)  Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this title.

The terms “merchants” and “between merchants” are defined in Section 2-104 of the UCC as follows:

(1)  “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

(3)  “Between merchants” means any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

Under 2-207(2) where the transaction is “between merchants” (in other words where the online customer “is chargeable with the knowledge or skill of a merchant”) then the proposed additions by the online customer could end up being additions to the contract. To avoid this kind of situation from arising, anyone selling goods over the Internet should include a clause expressly limiting acceptance to the terms of the offer and not ship where different terms are proposed by a customer.

The more interesting provision is 2-207(3), which provides that where the parties’ conduct recognizes the existence of a contract and the parties have in fact agreed on a quantity term, the terms of the contract are those on which the parties agree “together with any supplementary terms incorporated under any other provisions of this title.” This is what as known as the “Battle of the Forms” or the “knockout” clause in that the terms on which the forms of the parties “disagree” are “knocked out.” The courts are not clear as to how the battle of the forms should apply. In American Aluminum Products Co., Inc. v. Binswanger Glass Co., 194 Ga. App. 703, 391 S.E.2d 688 (1990) regarding whether specifications in a proposal were part of the contract, the court held that the counter-proposal constituted the contract and did not apply O.C.G.A. §11-2-207(3) to knock out any conflicting terms. A New York court has also held that the terms of a counter-proposal constituted the entire contract and the “knockout” rules wouldn’t apply.(18) However, there are many situations in which the “knockout” provisions have been held to apply.(19) The trick is that the rule applies only if the forms sent by each of the parties are all part of the agreement. An example would be Party A emails its proposal with its terms and conditions to Party B. Party B emails back that the proposal is accepted including its own different terms and conditions. Then Party A ships the goods. The “knockout” rule would apply. On the other hand, if Party B does not indicate acceptance of Party A’s proposal and sends a counterproposal and then Party A ships the goods then the “knockout” rule wouldn’t apply. This is because by shipping the goods, A has accepted B’s counterproposal. As can be seen from reading the cases, the actual application of all of these rules is more difficult than the discussion of the rules themselves.

The lesson here is that for mass market online transactions, the seller should make sure that goods are shipped only following express and unqualified acceptance of the seller’s terms. Those online sellers that are not involved in mass market transactions have to make sure there is a procedure to examine all messages received to avoid a “battle of the forms” surprise. Even where a seller’s proposal provides that “no change in terms is allowed,” shipping goods in response to a counterproposal that does change the terms is going to be construed by a court either to be an acceptance of the counter-proposal or as an agreement to which the “knock out” rule should apply. Note that when warranty disclaimers are “knocked out” the agreement is going to be governed by the default terms of the code which include such terms as implied warranty provisions – in other words the buyer wins.

B. Proposed Laws.

If enacted as presently proposed, Article 2B would cover online transactions involving:

(a) The online ordering and shipment or transmission of computer software, whether copies are sold or licensed;

(b) Computer software development agreements entered into online;

(c) The online ordering of “linear” movies and sound recordings followed by transmission;

(d) The online ordering and transmission of interactive media including educational CD ROM titles and computer games; and

(e) The online access to databases and/or other information.

Where Article 2B applies the following sections would be relevant to determining the terms of the agreement:

Section 2B-203. OFFER AND ACCEPTANCE, ACCEPTANCE WITH VARYING TERMS; ACCEPTANCE OF CONDITIONAL OFFERS.

Section 2B-207. ADOPTING TERMS OF RECORD.

Section 2B-208. MASS-MARKET LICENSES.

Section 2B-209. TERMS WHEN CONTRACT FORMED BY CONDUCT.

Section 2B-111. MANIFESTING ASSENT.

Section 2B-112. OPPORTUNITY TO REVIEW; REFUND.

Section 2B-102. DEFINITIONS.

Section 33. MERCHANT

Section 11. CONSUMER

Section2B-110. UNCONSCIONABLE CONTRACT OR TERM

Applying these provisions, the terms of an agreement would be determined as follows:

(1)  If the terms proposed by each of the parties agree, the parties are governed by those terms, except to the extent that the court considers any of such terms to be unconscionable.

(2)  The new scheme will permit sellers other than in mass-market transactions to obtain an agreement that certain terms will be subject to later agreement with minimal risk if agreement is not reached, but impose substantial costs on sellers who do not provide all the terms of the agreement to mass-market purchasers prior to purchase. In any transaction, other than a mass-market transaction, where a term is to be fixed by later agreement and the parties intend not to be bound until the term is so fixed, if the parties are not able to reach agreement on that term, each party must return all copies of information and other materials already received and return any sums paid for performance which has not been received. Contractual use restrictions will continue to apply. For mass-market transactions, terms that were not available when the purchaser obtained the software or information and to which the purchaser is not willing to later agree, entitle the purchaser to a refund, reimbursement of any reasonable expenses incurred relating to the return, and compensation for any foreseeable loss caused by the installation.(20)

(3) An acceptance which contains terms that vary, but not materially, from the terms of the offer results in the terms of the contract being those of the offer except that, between merchants, the proposed non-material additional terms become part of the contract unless notice of objection has been given or is given within a reasonable time.

(4) Where the terms that vary result in a material conflict, a contract is not formed unless all of the other circumstances, including the conduct of the parties, indicate that an agreement existed. If neither party agrees to the other party’s terms and the parties go ahead and act as though they have a contract anyway, the contract is considered to be formed by “conduct” and, rather than apply the “knockout” rules of the current Article 2, the court is supposed to take into account all relevant circumstances to determine the intent of the parties.

(5) Where either of the parties to an online transaction include in their standard form language that any agreement is conditioned on acceptance of their terms, such conditional language will have no effect unless the party using such form acts in a manner consistent with the language such as refusing to perform when its terms are not accepted.

With respect to most issues, Article 2B would simply clarify ambiguities in current law by codifying the law that the courts would likely apply anyway. There are a few differences in determining what terms would apply including:

(1) The knockout rule under 2-207 would be replaced by a sort of “all of the circumstances” determination by a court of the intent of the parties;

(2) Clickwrap licenses(21) would be enforceable but only to the extent they were accepted by the purchaser after the purchaser had an opportunity to review all of the terms. However, there would not be a lack of certainty about whether they would be enforceable at all. (Clickwrap licenses in the mass-market context would require reimbursement to the purchaser of all costs and expenses associated with a purchase if the purchaser did not accept the license after having an opportunity to review all of the terms.)

(3) With regard to access to databases which is currently governed by general common and statutory law outside of the UCC, the major difference is that where the parties make it clear that they believe they have an agreement, even if they haven’t agreed to all of the terms, they would have an agreement.

Also, it should be noted that Article 2B encourages, but does not require, that the parties set up commercially reasonable procedures for determining the authenticity of orders and provides that where one of the parties requires that a procedure be followed that is not commercially reasonable, the risk of loss falls on the party requiring such unreasonable procedure.(22)

C. Clickwrap Licenses.

Except where there may be a statute of frauds issue (requirements of writings and signatures are discussed later in this paper), clickwrap licenses are as likely to be enforceable to the same extent as agreements in any other form.(23) The writer is aware of only one case that apparently involved the enforceability of clickwrap licenses.(24) In that case, the United States District Court for the Northern District of California granted a preliminary injunction relying in part upon a claim for breach of contract for the defendant’s allegedly breaching the terms of service for using its e-mail service. The court did not discuss how the agreement was entered into and just assumed it was enforceable; however, agreements with “Hotmail” are clickwrap agreements.

Although there are no cases directly addressing the issue of enforceability of clickwrap licenses, there have been cases addressing the enforceability of shrinkwrap licenses. (Shrinkwrap licenses are licenses included with computer software that provide that the purchaser manifests assent by opening the package.) The 5th Circuit, applying Louisiana law (Louisiana is the only state that has never enacted Article 2 of the UCC), in the first case considering the enforceability of a shrinkwrap license, held that it was unenforceable.(25) In that case, the Plaintiff, Vault Corporation, had developed software which Vault’s software developer customers embedded in their software to prevent their end user customers from using the software on more than one computer. When the Vault Corporation sold its software, it included a shrinkwrap license that was expressly authorized by a Louisiana statute and prohibited reverse engineering of the software. The defendant, Quaid, had purchased the software and reversed engineered it. The 5th Circuit held that the shrinkwrap license and the related statute were unenforceable because they were “preempted” by copyright law.(26)

In Step-Saver Systems v. Wyse Technology and The Software Link, 939 F.2d 91 (3rd Cir. 1991), The Software Link had provided an operating system for Step-Saver to use for its professional office customers. The operating system did not work properly. Step-Saver had ordered many copies of the package. Step-Saver would telephone The Software Link and place an order for a number of copies. The Software Link would accept the order and promise, on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price and shipping and payment terms. The Software Link would ship the order promptly along with an invoice. The invoice would contain terms essentially the same as the purchase order. No reference was made during the telephone calls or on the purchase orders or in the invoices to any disclaimer of warranties. There was a shrinkwrap license enclosed with the software packages that disclaimed all warranties and limited damages. The shrinkwrap license did provide that the customer could return the software for a full refund if the customer didn’t accept the shrinkwrap license. The court applied the “battle of the forms” rules and determined that the agreement was complete with the telephone conversation when the goods were ordered coupled with the purchase order. The court held that the shrinkwrap license was sent after the fact and therefore could have no effect under the circumstances. The Software Link’s shrinkwrap license was also held unenforceable for the same reasons in Arizona Retail Systems, Inc. v. The Software Link, 831 F.Supp. 759 (D. Ariz. 1993).

In ProCD, Inc., v. Matthew Zeidenberg and Silken Mountain Web Services, Inc., 86 F.3rd 1447 (7th Cir. 1996), ProCD had developed and was selling copies of a CD ROM with a database of telephone numbers. Zeidenberg purchased the CD ROM at a store. The box showed that inside there was a shrinkwrap license. The shrinkwrap license provided that the purchaser was only receiving a license and that the purchaser was not to make copies of the product. Zeidenberg then made copies of the database onto his own web site and was providing access to the database to customers for a fee. There was no “battle of the forms” issue because the outside of the box gave notice to Zeidenberg at the time of purchase that the purchase would be subject to a license contained inside the box. The court rejected the preemption decision of Vault Corporation, supra, and held that the shrinkwrap license was enforceable. The court thus provided a way for database developers to protect their databases (by contract) even though the database here was probably not protectable under copyright law.(27) A district court for the Southern District of California in a case involving copying from a computer game,(28) the 7th Circuit again in a case involving a shrinkwrap license sent with a Gateway computer,(29) and an appellate court in New York state which allowed Gateway 2000 to require that any disputes be resolved by arbitration in Chicago, Illinois(30) have all approved and followed the decision in ProCD, supra.

Note that as discussed in end note 24, Article 2B, Section 2B-208 would modify the ProCD case somewhat in that where a mass-market purchaser could not view the terms of the license until the mass-market purchaser had taken the package home, the mass-market purchaser would also be entitled to reimbursement of all related expenses.

V. REQUIREMENT OF SIGNED WRITING

A. When is a writing and/or signature required?

1. Current law.

(a) General.

Every state of which the writer is aware, including Georgia, has a “statute of frauds” that requires certain agreements to be in writing and signed by the party to be charged in order to be enforceable. The Georgia statute reads in pertinent part:

To make the following obligations binding on the promisor, the promise must be in writing and signed by the party to be charged therewith or some person lawfully authorized by him:

(1) A promise by an executor, administrator, guardian, or trustee [to be personally liable for the debts of the estate, etc.];

(2) A promise to answer for the debt … of another;

(3) Any agreement made upon consideration of marriage …;

(4) Any contract for sale of lands, or any interest in, or concerning land;

(5) Any agreement that is not be performed within one year from the making thereof;

(6) Any promise to revive a debt barred by a statute of limitations; and

(7) Any commitment to lend money.(31)

Every state of which the author is aware will enforce agreements that are covered by the statute of frauds, even if not in writing or not signed, under certain specified circumstances. Those exceptions are:

(1) When the contract has been fully executed;

(2) Where there has been performance on one side, accepted by the other in accordance with the contract; or

(3) Where there has been such part performance of the contract as would render it a fraud by the party refusing to comply if the court did not compel a performance.(32)

The only sections of the general statute of frauds that are likely to have much effect on online transactions are the ones relating to sales of interests in land and to agreements not to be performed within one (1) year. Where the transaction is governed by Article 2 of the UCC, there is some controversy about whether courts would still also apply the general statute of frauds. The courts of which the writer is aware have held that if Article 2 applies, the general statute does not apply.(33) That leaves at least transactions involving an interest in land and agreements providing access to databases for more than a year subject to the general statute.

Can a transaction that takes place purely over the Internet result in a writing signed by the person to be charged? The answer to this question is likely to vary from jurisdiction to jurisdiction. In Department of Transportation v. Norris, 222 Ga. App. 361; 474 S.E.2d 216 (1996) the Georgia Court of Appeals held that the plaintiff’s claim was subject to dismissal because the plaintiff had not timely provided an “ante litem” notice. The requirement was that notice of any claim against the state must be given in writing within twelve (12) months of the date the loss was discovered or should have been discovered. The plaintiff had mailed and faxed the notice within the requisite period but the mailed notice was received after the expiration of the twelve months. The court decided that the facsimile transmission did not satisfy the statutory requirement that notice be given in writing stating in pertinent part:

Such a transmission is an audio signal via a telephone line containing information from which a writing may be accurately duplicated, but the transmission of beeps and chirps along a telephone line is not a writing, as that term is customarily used.

On certiorari, the Georgia Supreme Court reversed the Court of Appeals decision holding that the mailing of the notice was sufficient and left open the question of whether the sending of a facsimile constitutes notice in “writing.”(34)

In considering what constitutes a writing, it is also necessary to consider what constitutes a signature. In Troutt v. Nash AMC/Jeep, Inc., 157 Ga. App. 399, 278 S.E.2d 54 (1981), Troutt argued, among other things, that an automobile dealer was liable for failure to “sign the installment agreement” as required by the Georgia Motor Vehicle Sales Finance Act. The Act at that time provided in pertinent part:

A retail installment contract shall be in writing, shall be signed by both the buyer and the seller …

The installment agreement was fully typed out and filled in and the name of the dealer was on the paperwork. However, no one had signed on behalf of the dealer. Even though the Georgia Motor Vehicle Sales Finance Act is separate from the Uniform Commercial Code, the court applied the definition provided under the Uniform Commercial Code which reads:

“Signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing,

in holding that the printed name of the dealership on the form was sufficient to constitute a signature. If definitions under the Uniform Commercial Code are going to be applied outside the code, then it is appropriate to apply the definition of “written” or “writing” in O.C.G.A. §11-1-201 (46) which reads:

“Written” or “writing” includes printing, typewriting, or any other intentional reduction to tangible form.

Does the completion and online transmission of an order form, or other online communication such as an email message, constitute a “reduction to tangible form”? When an order or email is transmitted with the intention of entering into an agreement, it is certainly expected that the recipient will save the order or message in some way such as on the hard drive of a server. That is sufficient to meet the definition of “fixed in a tangible medium of expression” under the Copyright Act which reads in pertinent part:

A work is “fixed” in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.(35)

Under this analysis, it would be helpful for the parties to an agreement subject to the general statute of frauds to type in their name next to or with the addition of language substantially the same as:

I intend this to be my signature and for this document to be considered a writing.

Even assuming the Georgia appellate courts do not resurrect the rule that electronic transmissions, such as faxes, are not writings, there is a problem with the above analysis. Since the decision in Troutt v. Nash AMC/Jeep, Inc., supra, the Georgia Legislature enacted the “Georgia Electronic Records and Signatures Act” which became effective April 22, 1997.(36) Section 10-12-4. Agreement to Electronic Record or Signature reads in pertinent part:

Any person may, but shall not be required to, accept or agree to be bound by an electronic record which is executed or adopted with an electronic signature and, where that acceptance or agreement is otherwise required to be witnessed or notarized, which is witnessed or notarized, using an electronic signature. Where a person or other entity accepts or agrees to be bound by an electronic record as provided in this Code section, then:

(1) Any rule of law which requires a record of that type to be in writing shall be deemed satisfied;

(2) Any rule of law which requires a signature shall be deemed satisfied, and

(3) Any rule of law which requires a witness or notary shall be deemed satisfied by the electronic signature of such witness or notary.

“Electronic signature” is defined as:

an electronic or digital method executed or adopted by a party with the intent to be bound by or to authenticate a record, which is unique to the person using it, is capable of verification, is under the sole control of the person using it, and is linked to data in such a manner that if the data are changed, the electronic signature is invalidated.(37)

The term “Record” is defined as:

information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. “Record” includes both electronic records and printed, typewritten and tangible records.(38)

Section 10-12-2 of the Act relating to construction reads:

The provisions of this chapter shall be construed to promote the development of electronic government and electronic commerce.

So here we have a statute that was designed to promote electronic commerce but seems to provide that at least where the statute of frauds is applicable to be effective an electronic signature must be “unique to the person using it,” “capable of verification,” under the “sole control” of the person using it and be “linked to data in such a manner that if the data are changed the electronic signature is invalidated.”

Although it is by no means clear, without a new statute, it was reasonably likely that a court would have held that a clickwrap agreement or email with language showing that the parties intended that what they were transmitting be a signed writing would be held to constitute a signed agreement. With this statute, that proposition is very questionable and anyone needing to meet the requirements of the statute of frauds should assure that both parties are utilizing an encryption methodology to accomplish the requirements of the statute. It should be noted that the Georgia Electronic Signature Act is as liberal as any that have been enacted and other electronic signature statutes, such the Utah statute, require that much more elaborate procedures be followed, such as requiring the use of certification authorities.(39)

B. Uniform Commercial Code.

Although the above discussion regarding what constitutes a “writing” and/or “signature” also applies to any online transactions governed by the Uniform Commercial Code, there is more to consider with respect to transactions governed by the UCC.

2-201 of the Uniform Commercial Code entitled “Formal Requirements; Statute of Frauds” reads in pertinent part:

(1) Except as otherwise provided in this Code section, a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) of this code section against such party unless written notice of objection to its contents is given within ten days after it is received.

(3) A contract which does not satisfy the requirements of subsection (1) of this Code section but which is valid in other respects is enforceable:

(a) If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate the goods are for the buyer, has made either a substantial beginning of their manufacturer or commitments for their procurement; or

(b) If the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) With respect to goods for which payment has been received, made and accepted or which have been received and accepted.

Under the Uniform Commercial Code where the price equals or exceeds $500, a signed writing is required subject to the exceptions set forth above. However, the only term that must be in writing under Article 2 is the quantity of goods shown. Where the transaction is between merchants, all that is needed is a ” writing in confirmation” that is “sufficient against the sender” sent to the other party unless written notice of objection is given within ten (10) days after the writing is received.

When a transaction is between merchants, there still must be proof that a confirmation was sent.(40) The question remains in connection with an online transaction, even when the transaction is between merchants, whether the transmission of an order form and/or sending of an email constitutes a “writing” in Georgia unless it meets the requirements of The “Electronic Signatures Act” and, in other states, unless it meets requirements of other statutes of that nature.

C. Transfer of Copyrights

The Copyright Act provides that a voluntary “transfer of copyright ownership” is not valid unless made in a signed writing. The courts have interpreted this provision to also apply to exclusive licenses.(41) In order to protect one’s ownership of a copyright, or exclusive rights therein, it is necessary to record the transfer.(42) The words “writing” and “signed” are not defined in the Copyright Act. There is an open question whether interpretations of these terms under State law including construction under proposed acts would be accepted by Federal courts in construing the Copyright Act.

2. Proposed Laws

A. Article 2B. Section 2B-201 entitled “FORMAL REQUIREMENTS” provides that agreements requiring the payment of $5,000 or more are not enforceable unless there is a “record” which is “authenticated” by the party against which enforcement is sought or unless the contract involves a license with an agreed duration of less than one year. These requirements also do not apply if performance is provided and accepted or to the extent that the party against whom enforcement is sought admits the agreement. Additionally, like the Article 2 provision relating to “merchants,” Article 2B provides that between merchants where one merchant sends an authenticated record to the other merchant confirming an agreement and the other merchant does not respond within ten (10) days, such confirmation satisfies the statute of frauds with respect to both merchants. This section further provides that no other statute of frauds is applicable which has been assumed, but not expressly stated, with regard to the writing and signature requirements stated in Article 2.

Section 2B-113 entitled “LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATION” provides that a record or authentication may not be denied legal effect solely on the grounds that it is in electronic form.

So Article 2B, in order to avoid the technicalities that may be implied by the words “writing” and “signature,” uses the term “record” and “authentication” and expressly provides that electronic form is acceptable. To the extent Article 2B is enacted, it would be a simple matter to add language to order forms and emails so as to comply with the Article 2B statute of frauds. The problem is that even if enacted, Article 2B would not affect a substantial portion of online transactions including those involving the sale of goods, other than computer software, which are not transmitted in the online transaction.

In light of the requirements of the Georgia Electronic Records and Signatures Act, it is likely that even if Article 2B were enacted in Georgia, those transactions which are not covered by Article 2B would still be subject to unenforceability not expected by the parties acting in the ordinary course of business. Even if that statute were changed, the same risk would continue from similar and, in many cases, far stricter electronic signature statutes that have been enacted in many other states.

B. Electronic Transactions Act.

Under the proposed Electronic Transactions Act, if enacted in its current form, all online transactions in which the parties show that they intended the transmission to constitute a writing and to incorporate their signature would satisfy the statute of frauds in those states that passed that statute. Even if enacted in every state, the Electronic Transactions Act would not directly affect Section 204 of the Copyright Act and therefore would not directly apply to the transfer of copyrights.

VI. IMPLIED WARRANTIES

A major reason that licensees of software have tried to avoid application of the Uniform Commercial Code is to avoid imposition of implied warranties and the other warranty provisions of Article 2. Under common law, warranties were not implied. However, in light of the Uniform Commercial Code courts have, from time to time, applied Article 2 of the Uniform Commercial Code by analogy and held that implied warranties were applicable other than in connection just with the sale of goods.(43) The 5th Circuit in 1964 held that under Florida law implied warranties apply under common law.(44) On the other hand, there have been many cases in which the courts have held that implied warranties were not applicable outside of Article 2. With respect to online transactions, the implied warranties of Section 2-314 would apply to any purchases of goods and likely licenses of computer software and other goods, whether obtained through shipment or by transmissions. Although an implied warranty relating to accuracy of a database probably should not be governed by Article 2, any company offering information in a database would be taking an unreasonable risk not to include a disclaimer since, as stated above, courts might, by analogy, apply implied warranties to transactions that are not covered by Article 2. For example the Restatement of Torts 2d Section 552 provides that a provider of information is liable for failure to exercise care in obtaining or communicating information.

Proposed Article 2B-404 would provide that ordinarily there is no implied warranty of the accuracy of databases. Article 2B would apply the warranty only where the provider of information is a merchant in a “special relationship of reliance” with the purchaser of the information.(45)

ENDNOTES

1 Electronic Data Interchange (EDI) is the process whereby standardized forms or documents are transferred online for placing orders, billing, etc. See, Harry Newton, Newton’s Telecom Dictionary, Flatiron Publishing,1998. The ABA offers a form trading partner agreement for use in ongoing EDI transactions between the same parties.

2 Benjamin Wright and Jane K. Winn, The Law of Electronic Commerce, Aspen Law & Business, 3rd Ed. (1998)

3 See, e.g., O.C.G.A. §11-2-102.

4 See, Corporate Counsel’s Guide To The Uniform Commercial Code, Business Laws, Inc. at pp. 2.001 – 2.002 (1997) and J. Lee Gregory, Inc. v. Scandinavian House, L.P., 209 Ga. App. 285, 433 S.E.2d 687 (1993).

5 See, e.g., O.C.G.A. §11-2-105.

6 Validity, Construction and Application of Computer Software Licensing Agreements, 38 ALR 5th 1 and see, Schroeders, Inc. v. Hogan Systems, Inc., 522 N.Y.S.2d 404 (N.Y. Supp. Ct. 1987, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993), Advent Systems v. Unisys Corp., 925 F.2d 670 (3rd Cir. 1991), and NMP Corporation v. Parametric Technology Corporation, 958 F.Supp. 1536 (N.D. Okla., 1997).

7 See, Michael D. Scott, Scott On Computer Law, 2nd Edition, Section 7.09[B].

8 See, Cincinnati Gas & Electric Co. v. Goebel, 28 Ohio Misc. 2d, 502 N.E.2d 713 (1986).

9 See, Gall v. Allegheny County Health Department, 555 A.2d 786 (Penn. 1989).

10 See, Farina v. Mohawk Power Corp., 438 N.Y. Sub. 2d 645 (1981).

11 See, Kaplan v. Cablevision of Pa., Inc., 671 A.2d 716 (1996).

12 See, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993).

13 O.C.G.A. §10-12-1 et. seq.

14The latest versions may be downloaded from http://www.SoftwareIndustry.org and from http://www.law.upenn.edu/library/ulc/ulc.htm.

15 See, 17 U.S.C. §102.

16 See, Prefatory Note to Uniform Electronic Transactions Act. The Act is available at http://www.law.upenn.edu/bll/ulc/uecicta/98am.htm. Copies may also be obtained from the National Conference of Commissioners of Uniform State Laws, 211 East Ontario Street, Suite 1300, Chicago, IL 60611. The most recent draft of the Uniform Electronic Transactions Act (ETA) was prepared for the July 24-31, 1998 meeting of the National Conference of Commissioners of Uniform State laws.

17 See, Panfel v. Boyd, 187 Ga. App. 639, 371 S.E.2d 222 (1988).

18 See, CVS, Inc. v. Auburn Plastics, Inc., 67 A.D.2d 811, 413 N.Y.Supp.2d 50 (1979).

19 See, Corporate Counsel’s Guide To The Uniform Commercial Code, supra, pp. 2.088 and 2.089 and Diamond Fruit Growers, Inc., 794 F.2d at 1444 (9th Cir. 1986)

20 Contrary to ProCD, Inc. v. Zeidenberg and Silk & Mountain Web Services, Inc., 86 F.3rd 1147 (7th Cir. 1996), and other recent cases, a shrinkwrap license in connection with a license for computer software enclosed in a box in connection with a retail (mass market) sale where the purchaser is only notified that there is a license and for which the terms are not available until the purchaser has opened the box and/or installed the software would be subject, under Article 2B, not only to the right of refund; but also, to reimbursement of reasonable expenses and costs.

21 A clickwrap license is a license agreed to by a purchaser using a mouse to click an on-screen button to indicate assent to an agreement.`

22 Sections 2B-114, 2B-115 and 2B-116.

23 See, CompuServe, Inc. v. Richard S. Patterson, 89 F.3d 1257 (6th Cir. 1996). The 6th Circuit Court of Appeals held that an attorney who entered into a “shareware registration agreement” which required that the attorney type “agree” at various points in the document was bound by its terms including being subject to jurisdiction in the State of Ohio on any dispute regarding the agreement.

24 See, Hotmail Corporation v. Van Money Pie, Inc., 47 U.S.P.Q. 2nd (BNA) 1020 (1998); 1998 U.S.Dis. Lexis 10729 (April 16, 1998).

25 See, Vault Corporation v. Quaid Software Limited, 847 F.2d 255 (5th Cir. 1988).

26 Of course the court’s holding would imply that if preemption didn’t apply that the shrinkwrap license would be enforceable. Most courts that have decided the issue have held that agreements prohibiting reverse engineering and disclosure of confidential information are not preempted by the Copyright Act because they involve an agreement between consenting parties, and therefore are different from copyright which is imposed by law. See, e.g., Computer Associates v. Altai, 982 F2d 693 (2nd Cir. 1992).

27 See, e.g., Feist Publications, Inc. v. Rural Telephone Company Service, 499 U.S. 340 (1991). See also the section on copyright law being provided with this manual. For additional materials on copyright law, see the writer’s law firm web site at http://www.internetlegal.com. There is some concern among commentators that to allow unlimited use of shrinkwrap and clickwrap licenses to protect material not otherwise protected by copyright law could vitiate the copyright fair use doctrine.

28 See, Microstar v. Formgen, Inc., 942 F.Supp. 1312 (S.D. Cal. 1996).

29 See, Rich Hill and Enza Hill v. Gateway 2000, Inc., 105 F.3rd 1147 (7th Cir. 1997).

30 1998 N.Y. App. Div. Lexis 8872.

31 O.C.G.A. §13-5-30.

32 See, e.g., O.C.G.A § 13-5-31.

33 Corporate Counsel’s Guide To The Uniform Commercial Code, supra, at pp. 2.058 – 2.060.

34 See, Norris v. Department of Transportation, 268 Ga. 192, 486 S.E.2d 826 (1997).

35 See, 17 U.S.C. §101.

36 O.C.G.A. §10-12-1, et. seq.

37 See, O.C.G.A. §10-12-3.

38 O.C.G.A. §10-12-3.

39 See, Utah Digital Signatures Act, Utah Code Ann. §46-3-101, et. seq. (Supp. 1996).

40 See, Entertainment Sales Co. v. SNK, Inc., 232 Ga. App. 669, 1998 Ga. App. Lexis 641 (April 15, 1998).

41 See, 17 U.S.C.A. §§101 and 204.

42 See, 17 U.S.C.A. §205.

43 See, e.g., Holmes v. Worthey, 159 Ga. App. 262, 282 S.E.2d 919 (Ga. App. 1981) in which the court held that although ordinarily implied warranties wouldn’t apply, where a seller/builder is in direct privity with the buyer, the buyer has an implied warranty .

44 Sperry Rand Corp v. Industrial Supply Corp., 337 F.2d 363 (5th Cir. 1964).

45 Section 2B-404.

Rob Hassett is an attorney who practices in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta, Georgia.

The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.

© 1998, Rob Hassett, Atlanta, Georgia. All Right Reserved

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