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-Note - This article was presented at the National Business Institutes Seminar on “The Law of the Internet in Ohio” on May 14, 2004 by Steven M. Ott.

Electronic Commerce, affectionately referred to as “e-commerce” is the use of internet to conduct business. Businesses and consumers use web sites to actually conduct their business. This may be between businesses (i.e. business to business or B2B) or between businesses and consumers (i.e. B2C). Both B2B and B2C provide similar issues and issues unique to each. Both require the establishment of a web site. With the creation of an e-commerce web site come the web site development agreement and web site services agreement and possibly the web site hosting agreement. Each of these agreements has their own perils and unique attributes. This paper will not address the very important issues of trademarks, trade names, trade secrets, patents or licensing, all of which need scrutiny before an e-commerce site is established. Please do not forget all of the traditional commerce issues apply, even though the transactions are electronic.

What is Electronic Commerce

E-commerce is simply the establishment of an online business presence. The traditional principles of business apply here. One must first determine that doing business online is a good business decision; will the development and growth of the business be helped by going online or will their web presence be merely a distraction and financial drain. Technology in and of itself is not a magic potion for business success.

Is there a business need? What is the need? If it is to fulfill a technological need to keep up with the competition, then the need may not be sufficient to maintain the cost. However, the need may be as simple as to create e-mail capability or may be sufficiently complicated to process B2B or B2C transactions.

An analysis includes the consideration of the risks of going online. The age-old cost/benefit analysis is appropriate here. Is the client enhancing a known product line or creating an entirely new process?

Obviously, the more complicated the anticipated transactions, the more expensive the development of the site will be. The decision must be made to create and maintain the site in-house or to contract with a developer. Each suffers from their own problems and enjoys their own benefits. Either way, a competent developer must be utilized to implement the appropriate the technology for the site. Note that the technological side of the development is only half of the picture. The design of the site is equally critical. The customers create a feel for the site based upon the ease of use and well as the esthetic qualities. The coolest techno site may fail miserably because it is just plain ugly. The bottom line is attracting and maintaining online customer relations (and of course the business that flows from these relations).

In order to get started, it is necessary to understand the various relationships between these expected to use the site: customers, suppliers, advertisers, web hosts, affiliates, etc. These relationships are generally industry specific and may change over time. One should draft a flow chart showing the relevant business and legal relationships and issues. Once these are understood, the client (or her attorney) can begin to create the necessary legal documents. For example:

Basic Contract Provisions

Now that you decided to build an online presence, you must not forget the inherent legal issues. The internet transaction is like any other business transaction. Legal is but one factor to consider. But consider you must. Here is a list of issues that you must address and carefully reduce to writing:

1. Who will be the entity that produces your web site?

2. What services will this entity perform?

• Conceptualize the web site?

• Coding and development of the website?

• Hosting the website?

• Forwarding of customer order and payment information

• E-mail and internet access services?

• Debugging the website?

• Upgrades, enhancements and new technology?

3. What will each service cost?

4. What will be the process of development?

• Timeframe?

• Test runs?

• Modifications?

• Final approval?

5. What are the time periods for modifications due to:

• Bugs?

• Failure to perform as desired?

• Updated software developments?

• At whose costs?

6. Who owns the website and the content?

• Owner owns all?

• Developer owns all?

• Owner owns all except the “toolset,” i.e. the preexisting code and graphics used to create the website.

• Developer owns all but grants nonexclusive license to Owner

7. Can the developer put his logo on the website (free advertising?)

8. What about hiring away an employee of the Developer?

9. What is the user's response time? What is the size of the website? Bandwidth?

10. Warranties for maintenance back up, general warranties? Disclaimers? Privacy and encryption? Latest technology? Down time? Server response time?

11. Does the developer maintain operating policies and guidelines?

12. Direct Measures of quality

• Up time/ maintenance / server response time

• Performance metrics for hardware and software

• Capability to connect to Internet

• Specified response time

• Specified simultaneous user access

• Developer owns all but grants nonexclusive license to Owner

• Anti-virus

• Data/power back up

• Encryption and password protection

• Downloading data

13. What kinds of web browsers are supported by the website?

14. General disclaimers?

15. Policies and procedures for termination of website.

16. Mutual confidentiality and non-compete agreements

17. What intellectual property rights are transferred? Licensed? Who owns the copyright?

18. Who owns the “cookie information”?

19. What kinds of services are expected when the owner's clients connect to the web site?

20. Dispute resolution techniques.

Digital Signatures

Business transactions in the information age continue to be governed by the UCC, however, the transactions are warped by the various alphabet soup of titles of statues recently promulgated.

Uniform Electronic Transaction Act (UETA ) validates the use of electronic records and electronic signatures but neither mandates their use nor specifies technological criteria for establishing valid electronic records and electronic signatures. Essentially it provides that record, contract or signature may not be denied its legal status due to the fact that it is in electronic form. If a law requires a signature, an electronic signature can satisfy that requirement. UETA applies to a transaction which is defined as an action or set of actions occurring between two or more persons which relate the conduct of business or commerce.

Electronic Records in Global and National Commerce Act, S. 761 (106th Congress, 2000) (Most provisions effective October 1, 2000 )

This act, popularly referred to as "ESign," in fact has as one of its primary purposes to repeal state law requirements for written instruments as they apply to electronic agreements. It seeks to eliminate existing barriers to e-commerce caused by traditional requirements that some records must be signed and retained on paper to be effective. This federal law applies to practically all consumer, commercial, and business agreements. It also expressly applies to the sale, lease, exchange and other disposition of any interest in real estate. The operative language is quite clear and succinct:

"Notwithstanding any statute, regulation, or other rule of law [other than subsequent parts of this same statute], with respect to any transactions in or affecting interstate or foreign commerce:

(1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity or enforceability solely because it is in electronic form; and

(2) a contract relating to such transaction may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used in its formation.

The operative term, obviously, is "transaction." ESign provides a very broad definition:

"The term "transaction" means an action or set of actions relating to the conduct of a business, consumer or commercial affairs between two or more persons, including any of the following types of conduct:

(A) the sale, lease, exchange, or other disposition of [personal property and intangibles]

(B) the sale, lease, exchange or other disposition of any interest in real property, or any combination thereof.

Congress has provided that almost anything can be an electronic signature rendering a party bound to agreement. Here is the statutory language:

"The term "electronic signature" means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."



(2000 H 488, eff. 9-14-00 )

Does not apply to:

Chapter :









Applies to:

Chapter :



1302. SALES

1310. LEASES



























The Electronic Signatures in Global and National Commerce Act, S. 761 (E-SIGN) , with an effective date of October 1, 2000, was adopted by Congress on June 16, 2000 and signed by the President June 30, 2000.

E-Sign does allow UETA to preempt the federal law. After stating in Section 101(a) that a signature, contract or record in interstate commerce shall not be denied validity because it is in electronic form, the Act states in pertinent part:


(A) In General.--A State statute, regulation, or other rule of law may modify, limit, or supersede the provisions of section 101 with respect to State law only if such statute, regulation, or rule of law--

(1) constitutes an enactment or adoption of the Uniform Electronic Transactions Act as approved and recommended for enactment in all the States by the National Conference of Commissioners on Uniform State Laws in 1999, except that any exception to the scope of such Act enacted by a State under section 3(b)(4) of such Act shall be preempted to the extent such exception is inconsistent with this title or title II, or would not be permitted under paragraph (2)(A)(ii) of this subsection; or

(2)(A) specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, if--

(i) such alternative procedures or requirements are consistent with this title and title II; and

(ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and

(B) if enacted or adopted after the date of the enactment of this Act, makes specific reference to this Act.

Uniform Computer Information Transaction Act (UCITA)

UCITA is a substantive uniform law that may, in the various forms adopted by state legislatures, be superimposed on the common law in connection with contracts for the licensing of 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. UCITA applies to all transfers of software and computer games, software development and software maintenance contracts, contracts for multimedia projects, online subscription and membership agreements, and other forms of computer information transactions.

UCITA is a commercial code, not a regulatory code. It provides a series of default rules that operate unless the parties agree otherwise. Think of it as a statutory form contract. Parties can make a license on basic terms, such as scope of use and license fee, leaving other terms, such as warranties, to the statutory default rules. Or they can override the defaults and adopt their own rules. It is their choice. A few rules cannot be changed, such as the obligation to act in good faith and consumer protection rules. But the basic principle is freedom of contract.

UCITA is predicated upon the following principles:

1. the paradigm transaction is a license of computer information rather than a sale of goods;

2. innovation and competitiveness have come from smaller entrepreneurial companies as well as larger companies;

3. computer information transactions engage fundamental free speech issues;

4. a commercial law statute should support contract freedom and interpretation of agreements in light of the practical commercial context; and

5. a substantive framework for internet contracting is needed to facilitate commerce in computer information.

Generally, the UCITA defaults try to reflect customary commercial practice. In select cases, UCITA intentionally tips the balance at the starting gate. For example, although software vendors routinely do not agree to pay consequential damages (lost profits), UCITA awards consequentials as the default rule unless the parties contract otherwise.

The drafting process for UCITA has been the most open and well attended in the history of any uniform law. There have been hundreds of participants representing both large and small software developers, publishers, licensees and consumer interests. While many are lawyers, a significant number of non-lawyer software professionals have also been present. Attendance is open and participation encouraged. The Drafting Committee has no agenda other than to draft a uniform law that reflects commercial practices. Obviously, there are differences of opinion, but this does not mean that all points of view have not been considered or the result is unbalanced.

Those who oppose UCITA generally fall into a number of well recognized categories: (1) "Consumer advocates" who want UCITA and by extension other State contract law to create a series of mandatory rules under which goods, services, and information may be purchased or licensed; (2) "Purists" who believe that existing commercial practices in the information industry are inconsistent with traditional contract law and view the creation of UCITA as an opportunity to change these practices to reflect their views of the "correct" way of forming and interpreting contracts; (3) "Traditionalists" who are all in favor of having a broad universal legal framework for these types of transactions, as long as the framework reflects only their industry practices; and (4) "Lobbyists" who are interested in protecting their industry groups regardless of the fairness of their positions on other groups or traditional commercial practice.

Each of these groups tends to have a narrow, parochial focus regarding the proposed statute that will increase the costs of these transactions by requiring vendors to change their existing, and highly efficient, contracting models or by destroying the potential for passage of the Article and thus leaving the law to develop State by State and case by case without providing a needed, predictable framework for the information industry to be able to continue to grow. What these groups have in common is their ability to be able to command attention from the media out of all proportion to the reasonableness of their positions or their support in the drafting process or in the economy as a whole.

UCITA has been enacted in only a few states. In fact Thirty-three attorney generals signed a statement opposing UCITA.

Guidelines for Drafting Shrink-Wrap and Click-Wrap Agreements

There is currently great variation in the language used in shrink-wrap and click-wrap agreements. In part, such variation is due to the uncertainty caused by the lack of court decisions interpreting such agreements. Although the following steps, at this time, do not ensure enforceability, they address many of the currently identified legal obstacles.

(1) The license or agreement should give the user or buyer clear notice at the time of purchase that a transaction is subject to such an agreement.

(2) This notice should be clearly visible to the user or buyer at the outset of the transaction and should include conspicuous warnings about the conduct deemed to be acceptance of the license. For example, the notice may be displayed as part of an online ordering screen. Since the agreement will typically be directed at non-lawyers, the notice (and the license itself) should be clear and concise so that an average person can understand the nature and terms of the agreement.

(3) The detailed license terms must be disclosed to the user or buyer prior to or shortly after the start of use of the licensed or purchased materials.

(4) The user or buyer should be offered a refund if he or she decides to reject the terms. The user or buyer should also be provided with an easy method for returning the purchase or canceling the agreement.

(5) The user or buyer's method of accepting the terms of the agreement should involve a specifically defined action, such as clicking a box or typing "yes" before being permitted to continue in a transaction, in addition to the user's continued use of the licensed materials.

(6) If a shrink-wrap or click-wrap agreement will include terms which are uncommon in an industry or are likely to surprise or affect the decision of the user or buyer, such terms should be highlighted to the customer before the conclusion of the transaction. For example, in a fully online transaction, it may be possible to set up a Web page so that a user would have to review all terms of the transaction before making a decision. Depending on the particular means of presentation, such a "virtual box" could have unlimited space for displaying contract terms.

Electronic Securities Transaction Act

The purposes of this Act are (1) to permit and encourage the continued expansion of electronic commerce in securities transactions; and (2) to facilitate and promote electronic commerce in securities transactions by clarifying the legal status of electronic signatures for signed documents and records used in relation to securities transactions involving broker-dealers, transfer agents and investment advisers.

Section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o), Section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1) and Section 215 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-15) were amended by allowing the use of electronic signatures. Parties may use and rely on an electronic signatures. Whenever one of these statutes required a signature, an electronic one will do.

Encryption and Security Issues

When a business contemplates establishing a commercial presence on the Internet, transactional privacy becomes a major concern. The ability to authenticate messages, transactions and identities of parties are of paramount importance. Purchases over the Internet cannot take place safely with out appropriate safeguards. Encryption provides a method for securely communicating over the Internet.

Encryption is a means of encoding information so that it cannot be decoded and read without a 'key'. Computers have revolutionized encryption because they can encode and decode at high speed and encryption programs now come as 'plug-ins' for a lot of common software. They can also use far more complex systems of encryption that are far harder to break.

Older systems of encryption required the transmission of the encrypted message, but also the key to enable decryption. This is a problem because it requires that one is able to securely send the key to the message recipient before they could receive an encrypted message. This problem was solved in the 1980s with a new system called 'public key encryption'. Public key encryption uses two keys; one key, the public key, is used to encrypt the data, and another, the private key, is used to decrypt it. Public key encryption system is based on highly complex mathematical functions so complex that they cannot be solved without the unique combination of these two keys. It would take an impractical amount of time with even a super computer to find the solution to the mathematical problem that allows decryption. This means that one can make 'public' half of the key available to anyone to encrypt a message with, but the complexity of the encryption system means that the 'private' key cannot be determined from the content of the public key.

A digital signature is a personalized form of identity that provides proof of authenticity. Digital signatures are a form of data encryption that proves the authenticity of a document. A statistical digest of the content of the document is produced. This is then encrypted with an encryption key to produce the digital signature. The complex relationship of the encryption cipher makes forgery of the signature impracticable without possession of the encryption key. Therefore, when the signature is validated, it provides proof that the document or file can only have been signed by the holder of that encryption key.

Even if one does not wish to encrypt data, using digital signatures is a very easy means of preventing one's identity from being misused on the Internet. The purpose of digital signatures is to provide an encrypted 'digest' of the message alongside the normal copy of the message. Sending a signed message usually involves the same process as sending an encrypted message, but instead one asks the program only to sign the message. This 'signature' is then appended to the end of the file or email message.

Unique B2B and B2C Issues

Business to business (B2B) internet marketplaces hold great promise for increasing the efficiency of procurement and other services performed on a daily basis, but raise a number of practical and legal issues. Some of the emerging issues in the B2B marketplace follows.

Internet based B2B marketplaces tend to focus upon either vertical or horizontal markets. Vertical B2B marketplaces automate the procurement process within an industry by bringing buyers and sellers at different levels of distribution together to transact business. Such vertical B2B marketplaces often supplement their services by providing industry specific information and are of the greatest benefit to marketplaces characterized by fragmentation among buyers and sellers and an efficient traditional supply chain.

Horizontal B2B marketplaces, in contrast, provide industry neutral goods or services, such as office supplies or temporary staffing, to a variety of different industries. Horizontal B2B marketplaces are most successful for providers whose products or services are standardized across industries. Both vertical and horizontal B2B marketplaces can employ a variety of formats to bring buyers and sellers together on-line including aggregated catalogs, auctions and exchanges.

Catalog aggregator websites provide buyers with a one-stop shopping venue for thousands of parts and products from multiple vendors. Such sites feature powerful search engines that allow the user to find products or services quickly and easily. This format is most appropriate for expensive goods that are purchased frequently and in small quantities, when it is not economically efficient to negotiate price in terms on every trade.

Automated auctions allow multiple parties to bid competitively during a limited time for products from individual suppliers. Variations on the auction formatting include bulletin boards and request for quotes. This format allows a seller or buyer to post a solicitation for bid or offer and select from among the responses.

Established on-line B2B exchanges allow buyers and sellers to bid continuously on a good or service, thereby engaging in real time dynamic pricing. Effectively, exchanges are continuous two-way auctions.

The formation of a B2B marketplace presents numerous legal and regulatory issues that should be addressed including membership criteria, marketplace rules and adding trust issues.

Most B2B marketplaces will serve a variety of user groups including suppliers, buyers, data vendors, service providers, and the general public, all of whom have varying business objectives. The new B2B marketplace must decide whether participants should apply and contract exclusively on-line and whether membership shall be open, limited, or closed. Because B2B entities typically involve fewer members or participants than B2C companies, B2B organizations have greater freedom to qualify and enroll members offline.

Membership in the B2B marketplace is usually predicated on acceptance of terms regarding the conduct of transactions, the service fees charged to members, the hours of operation of the site, and the distribution and administration of access passwords. The marketplace rules usually prohibit the posting of infringing information or viruses and the use of the site for unlawful purposes. In addition, the terms may address the ownership of an auctioned property associated with the site and confidentiality and privacy requirements, as well as allocations of liability between members and B2B entity, and then the obligations, warranties, and related disclaimers and termination and dispute resolution provisions.

Because B2B marketplaces inherently involve some degree of collaboration among competitors, they have directed a great deal of anti-trust scrutiny. The fear is that on-line marketplaces may create a sitting for anti-competitive coordination that could lead to reduced price competition and higher market prices. The internet tends to foster facilities that become more valuable to each user as more users sign-on. Such network effects may tend to encourage the growth of dominant on-line marketplaces with substantial market power.

To survive anti-trust scrutiny, a proposed marketplace should seek to minimize the on-line sharing of pricing and transaction data among the competitors through technological and behavioral firewalls and to protect against coordination. Parties establishing a B2B marketplace may further reduce the anti-trust concerns about anti-competitive information sharing by having independent parties handle the day-to-day operations of the marketplace.

In addition, to the above, the nature of B2B exchanges suggest that they have common contracting needs. Participating companies frequently place some of their best technology people at B2B exchanges. Participating companies therefore frequently rely on B2B exchanges to guide their own internal technology purchasing. A technology provider who sells to a B2B exchange may make additional sales to the participating companies by a virtue of its relationship with the B2B exchange. Therefore, B2B exchanges should consider whether it should capitalize on this phenomenon by becoming a re-saler of the technology provider solutions.

B2B exchanges frequently end up with different consultants from the ones they start with. The scope of projects may change considerably during an engagement. Accordingly, the following clauses and consultant service agreements should be paid special attention:

1. changes in scope;

2. termination for convenience;

3. transition services upon termination;

4. intellectual pro_______ that is intellectual property ownership of interim work product; and,

5. delivery of interim work product upon termination.

The following provisions need careful scrutiny in the technology providers contract. The failure of a B2B exchange to operate for any reason can have catastrophic consequences to an entire industry that has grown to depend on the availability of the B2B exchanges' functionality. On service levels, getting maximum effort from the technology vendor to resolve failures of the B2B exchanged operate can be a critical need of a B2B exchange to the termination rights of the technology provider should be examined carefully. Consider a long-term nation rights only to exist for the nature of the damage to the technology provider equals or exceeds the damage to the entire industries operations for a failure of the technology be available (even though that ____ sort terminate this agreement for any reason, including without limitation, any default or other breach of this agreement.)

Generally, a cross contract multi-party informal dispute resolution procedure may be needed. Consistent choice of law, venue, mediation arbitration provisions should be considered across all technology contracts. The technology contracts may also need to address clearly the consequences of the failure of the B2B exchange or a third-party to perform, thereby exonerating the technology provider from some responsibility while keeping its feet to the fire for what it is responsible to complete.

If a B2B exchanges technological solution will require different behaviors at member companies and other trading partners, it may be appropriate to contemplate the possibility that adopting the technology will take time. Therefore, all the following issues should be considered in the contracts with technology providers:

Payment terms should be considered. Time payment to adoption of the technology may be appropriate.

B2B exchange may want to place greater emphasis on education and training for users as well as promotion activities.

B2B exchanges do fail on occasion. If the need of the member companies still exist. The following issues should be considered within the technology providers contracts:

1. The right of a member company or even more than one to take over the operations of the B2B exchange.

2. The right of a member company to substitute its purchases if additional technology required for the B2B exchange to be a substitute for additional purchases by the B2B exchange.

B2C Issues

In addressing business to consumer (B2C issues) issues over the internet, the law has focused on a few key elements of consumer transactions:

1. formation of enforceable electronic agreements;

2. consumer protection standards; and,

3. protection before private information.

Formation of enforceable electronic agreements discussed above are the significant efforts of the United States who is the Uniform Electronic Transaction Act (UETA) and the Electronic Signatures and Global Commerce Act (Esign). Ohio has adopted both of these and its Electronic Transactions Act, are seeking Chapter 1306. Consumer transactions making use of the internet are subject the same consumer protection laws as other transactions. Most significantly, federal and state law expressly regulate warranties provided to consumers and prohibit false or deceptive advertisements. In addition, the UCC creates specific duties with respect to warranties. The Magnuson-Moss Warranty Act, 15 U.S.C., § 2301-2312 does not require sellers to provide any warranties. If, however, seller chooses to provide a warranty, Magnuson-Moss establishes three basic requirements:

For all consumer products it costs more than $10, the warrantor must designate, or title a written warranty as either full or limited.

A warrantor must state certain specified information about the coverage of the warranty in a single, clear and easy-to-read document.

For consumer products it costs more than $15, a warrantor must ensure that warranties are available to a consumer before they buy a product. Magnuson-Moss prohibits disclaimer or modification of implied warranties or merchantability or fitness for a purpose, and prohibits tie-in sales (or conditioning a warranty for one product on the purchase of a second product; and it prohibits false or deceptive warranties.)

In addition to Magnuson-Moss, internet sellers must consider the effect of the Uniform Commercial code, in particular, Article II, on potential claims for breach of express or implied warranties. Care should be given to determine whether or not a transaction is commercial or consumer in nature.

In addition to specifying rules related to warranties, host a federal and state laws prohibit false advertising and deceptive trade practices. On the federal level, the most significant consumer protection statute is Section 5 of the Federal Trade Commission Act (Section 5) which prohibits deceptive or unfair acts and practices. 15 U.S.C., § 45. Section 5 does not provide a private cause of action. However, many similar state statutes provide for private claims.) Many state unfair competition laws allow for recovery of trouble damages. Furthermore, private false advertising claims may be brought by injured competitors under Section 43(A) of the Lanham Act which provides: any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any award, term, name, similar device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact which . . . misrepresents the nature, characteristics, qualities or geographic origin of his or her other persons, goods, services or commercial activities shall be liable in a civil action by any person who believes that he or she is or likely to be damaged by such Act. 15 U.S.C. §1125(A).

Perhaps the most publicized set of issues related to consumer transactions over the internet concern privacy of personal information. The internet has brought concerns over privacy to the forefront, because of its ability to spread information instantaneously around the globe. To develop an effective privacy program, a business must have a clear picture of where it is and where it is going.

Key questions to consider when developing privacy objectives include:

1. what information must be protected under applicable law;

2. what information our business partners or consumers are likely to consider most sensitive;

3. to what extent can privacy obligations be met by providing notice of how the business operates with respect to private information and disclaiming responsibility;

4. who will have management responsibility for oversight privacy;

5. what technological changes are required;

6. what technology changes are feasible to implement new privacy policies; and,

7. what business procedures, policies, and trainings will be required.

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