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‘Tis the Season for E-Commerce

This article by Stuart Adams appeared in Louisville Computer News December, 1998

The frenzied holiday shopping season is probably no time to depend on E-Commerce, but if you haven’t already joined the crowd letting the "modem do the walking," rather than your feet, maybe its time to at least try it. This season promises to be the busiest yet for electronic shopping. Over the next year, however, there should be an explosion of online commerce for several reasons.

Up to this point, computers have been relatively expensive, so access has been somewhat limited. Many have also feared that if they divulged their credit card number online, some deviant hacker somewhere would pirate it off and run up a huge bill, which would be hard to undo.

The Dawn of E-Commerce Explosion

Over the last few months, however, prices of computers and online service providers have plummeted. At the same time, the security of online financial transactions has been dramatically improved. This results in industry predictions that more people will be using computers, have easier and cheaper access to e-commerce, and have more confidence in the security of their online transactions. Debit cards and electronic banking are also making inroads. Vendors in the next year will probably be conspicuous by their absence, if they do not boast online shopping and customer service options.

"The Donald" and Others are Watching You

Vendors, using emerging software tools, such as Extensible Markup Language (XML), are profiting from added capabilities in previously unheard of information retrieval. As an example, Trump Casino Services plans to teach visitors to its Web site how to play casino games as a lead generation technique to increase its customer base. Aside from using the Web site to allow customers to make hotel reservations, sell tickets and merchandise, Trump will be able to find out how long the customer stays online, the amount of time spent playing particular games, their game ability level and a variety of other customer preference information to build a customer profile.

General Nutrition Company, a Pittsburgh based maker of nutrition supplements used e-commerce techniques, including Signal SegWay Suite, to expand globally. This allowed 2,500 franchisees, including 200 overseas, to have real time access to product listings, and to customize orders, thus increasing ship rates and franchisee satisfaction. The product is designed to be tailored to the customer’s business rules and can apparently be integrated into legacy mainframes and client-server applications so non-peer systems can exchange data in real time.

Sell Your Stock Online

Companies are even selling their stock online. Home Depot won’t sell products through its Web site but plans by the end of the year to offer its stock, using the services of StockPower, Inc. This is a San Francisco based start-up in the business of helping companies automate the marketing of their stock to the public online. In 1994 there were 52 companies offering direct stock purchase programs. That year, the Securities and Exchange Commission made the rules easier for companies to set up direct sale programs and thus helped jump start online sales. A recent Wall Street Journal article estimated the 1994 number to have increased to about 500 at present, with around five million investors participating.

Commerce Moves to Warp Speed

Technology has caused both actual and expected speed to increase in business transactions. The fax, cell phone and pager have all helped us accelerate the pace at which we negotiate and close our deals. In order to edge out the competition for those deals we seem to have to move faster and faster.

All this leads to the possibility that traditional safeguards will be forgotten in our haste to "do the deal" faster and faster. The key to survival is our ability to be able to form, perform and enforce legally binding contracts online. Our current methods of e-commerce would have seemed like science fiction less than a generation ago.

Because it takes so much time for a problem to develop, go through litigation and then be decided by an appellate court, so the legal decision is reported online, case law is slow in developing in the area of new technology. Historically, however, the courts have always dealt with new technology by somehow requiring it to fit into existing legal principles. We must therefore look to those traditional elements of legally binding contracts as we continue to explore otherwise novel ways doing business.

Remember Contract Basics in E-Commerce

Many companies have developed a system of form contracts and "rules" to ensure that their employees will not miss any details, particular contract terms or steps in the process of negotiating, closing and performing their deals. Unscrupulous vendors, however, have been known to have the ability to bypass or pierce these procedures by a variety of techniques, including simply changing the rules in midstream and getting your money without any written documentation of the deal.

E-mail is great for speed but has derailed many a legal claim for contract enforcement. There are basically two parts to a valid contract. Those are the "offer" (a manifestation of one party’s intent to enter into a specific bargain with another party) and the "acceptance" (assent to the terms of the offer and agreement to compliance on a contractual level). You might be surprised how much litigation deals only with the issues of whether there was an actual valid offer or acceptance or timely transmission of the acceptance to the offering party.

There must also be a "meeting of the minds" to the extent that both parties can legally be held to have understood what they were bargaining for, and there must ordinarily be adequate consideration on each side for the transaction. That does not convert necessarily to a defense that you didn’t know what you were getting or didn’t get the same benefit out of the deal as did the other party.

Not to be forgotten in electronic commerce is the defense of the Statute of Frauds. This doctrine, originating in England like many of our laws, has been adopted in some varying forms in every state. Typically it requires certain types of agreements, such as those dealing with an interest in land or a contract not to be performed within one year of its execution, to be memorialized in writing and signed. I’m not aware of any court which has yet addressed the enforceability of purely electronic contracts under the Statute of Frauds but that is surely coming. There are decisions allowing faxed signatures in some jurisdictions but the point and click case law has not fully developed. The Uniform Commercial Code (UCC) which has been adopted in some form in every state to regulate commercial transactions, deals very liberally with the definition of "writing." Case law, however, is still pretty much dealing with telegraphs.

Lawyers who negotiate and draft contracts go to great lengths to provide seemingly excruciating details of just what the deal includes and excludes (often equally important), as well as the statement of what is being paid and when, warranties for performance on each side, time frame for each step in the series of transactions that make up the complete deal, what happens if something goes wrong, how you enforce your rights, and the jurisdiction in which you are allowed to fight.

Some people still transact business on a handshake. That’s great if it works. Lawyers, however, kill so many trees drafting contract provisions because the law books are full of cases where somebody tried a particular way to slip one by their business partner. Lawyers are trained to recognize those areas of the deal and to flesh out the details and boundaries so that there is less room for "misunderstanding" and sharper teeth to clearly enforce the bargain.

Keep in mind, when contracting electronically, that businesses, which have for years been using electronic data interchange (EDI) to link their computers with vendors and customers in order to transmit purchase orders, invoices and receipts, historically have used a lengthy, written, detailed, signed trading partner agreement to define what happens if things do not go as expected. These are often the subject of extensive research and negotiation. While the day to day transactions may travel at high speed, they are preceded by classic legal documentation.

"Shrink Wrap" and "Point & Click" Contracts

On the other hand, we have the "shrink wrap" and "point and click" agreement, which has become a standard in the software and Web commerce arena. With these agreements, there is no negotiation, extensive disclaimer of your rights and, perhaps, little documentation of what you are really getting except for what you see on your screen. When the item arrives, or doesn’t, you may find you have little in the way of realistic remedies. The vendor may already be out of business or may be in a remote jurisdiction where you have little chance of collection. This is particularly true of customer service in the purchase of computers.

The online purchase and service of computers and peripheral devices is rapidly getting the same reputation as the sale of used cars. Often, because of price, vendors are wrapping some other vendor’s throw away parts into what appears and is advertised as a new bleeding edge machine. What you find when you pop open the box or call technical support, however, is that they don’t have the right software driver to make your gadget work, they can’t figure out who made the bad component or they themselves have either been bought out or gone out of business. Any of these scenarios leaves you high and dry. How can you download the patch or new driver if your computer doesn’t recognize your modem?

The UCC contains provisions dealing with warranties and acceptance or rejection of goods. There are also numerous pieces of consumer legislation at the state and federal level designed to protect consumers. Many people, however, do not fully realize that if they are involved in e-commerce transactions on behalf of or in the name of a business, these consumer laws may not apply to them. Small businesses often compound this problem by personally guaranteeing a business obligation. They thus lose their consumer protection while being obligated personally to pay the debt of the business.

A new UCC Article 2B has been in the drafting stages for quite some time. It is intended to close the gap in the law in the areas of software contracts and mass-market licenses. Don’t look for any relief soon, however, since this must still get out of the drafting stage and into the legislatures of the states, one by one. Then it will have to be tested in practice and in the courts. By then even newer technology may make it at least partially obsolete.

Unlimited New Web-based Business Opportunities

New software tools are providing a fertile opportunity for businesses to go international or to otherwise expand their market share. Even more important, however, may be the emergence of a wide variety of new companies that could not exist but for the new technologies being developed. The ability to "scan" or sample huge numbers of individuals and business who have left a "trail" available on the Internet, gives rise to research possibilities previously unrivaled as to scale. The new businesses which can take advantage of these tools to fulfill database needs, such as corporate customer profiles, is seemingly unlimited. Now, not only can you do your holiday shopping on the Web, you can sell stock in your new Web-based business so you can pay for your purchases before the credit card bills arrive in January or February.

Stuart  Adams Law Office, P.S.C.
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