2. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Lecture 10: Internet Payment Systems

3. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Clickwrap Agreements UCC §2-204: “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.” Shrinkwrap agreement: triggered by unwrapping and using the software. “Notice on the outside, terms on the inside.” Enforceable if the user can return the goods without penalty if he chooses not to accept Clickwrap: triggered by clicking “I Accept” after the agreement is displayed. Enforceable, since the click shows agreement. Hotmail Corporation v. Van Money Pie Inc., et al., C98-20064 (N.D. Ca., April 20, 1998) Question: evidence of clicking?

4. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS “Browsewrap” Agreements “Terms of use” buried in a page behind the frontpage Is a user bound by them in the absence of express acceptance? Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y 2001)Specht v. Netscape Communications Corp., –Court refused to enforce a Netscape browsewrap license –Netscape did no more than place notice of the license on the same webpage where it had made the download available –Netscape's license "allows a user to download and use the software without taking any action that plainly manifests assent to the terms of the associated license or indicates an understanding that a contract is being formed."

5. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Transactions Pennsylvania Electronic Transactions Act (signed 12/16/99). A version of the Uniform Electronic Transactions ActElectronic Transactions ActUniform Electronic Transactions Act All parties must consent to the electronic transaction. “Electronic signature. -- An electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.“ “If a law requires a record to be in writing, an electronic record satisfies the law.” “If a law requires a signature, an electronic signature satisfies the law.”

6. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Digital Signature Legislation Electronic Signatures in Global and National Commerce Act (effective October 1, 2000)Electronic Signatures in Global and National Commerce Act “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. Electronic signatures valid, not required Must be accepted by government agencies Consumer disclosure and consent Retention satisfied by electronic records Federal pre-emption Electronic notarization, transferable records List of exceptions (wills, various cancellation notices)

7. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Regulation of Money Regulating money and its value are essential to commerce eCommerce permits very rapid movement of money equivalents in large value outside the banking system Electronic forms of money, payment orders and debt do not have the same safeguards as familiar paper forms Risk of hacking, identity theft, etc.

8. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Regulation of Money “The Congress shall have Power … To coin Money, regulate the Value thereof, and of foreign Coin … ” Art I, Sec. 8 “No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts … ” Art. 1, Sec. 10 Money supply: Federal Reserve Bank Banking regulation: Treasury Department Comptroller of the Currency

9. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Soma v. Standard Chartered Bank Soma Medical International v. Standard Chartered Bank, 196 F.3d 1292 (10th Cir. 1999). Full text.Full text Soma is a Delaware corporation doing business in Utah Standard Chartered Bank (SCB) is a UK bank with an office in Hong Kong (no presence in Utah) Soma had an account with SCB’s Hong Kong office SCB maintained a website accessible from Utah Defendant Fong submitted a forged signature card to SCB; then withdrew $250,000 from Soma’s account Soma sued SCB in Utah HELD, no jurisdiction in Utah since SCB had a “passive Web site that does little more than make information available to those who are interested”

10. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Opinion of the Attorney General of North Carolina East Carolina University (part of the state university system) wanted 1. students to deposit money with the school to be used with a debit card to buy books, laundry services, etc. 2. to extend the debit card program to other businesses The University asked the N.C. Attorney General for an opinion on legality Opinion: 1 is legal; 2 is not If the University holds funds as a financial intermediary it is a “financial institution” which must be chartered as a bank under North Carolina or Federal laws (and be regulated as such) If the University accepts prepayments for services that it will render itself to a student, it is not an “intermediary” 1993 N.C. AG LEXIS 75

11. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Cash Debate about whether new form requires new regulation E-cash may be based on software or hardware, and focused on larger or smaller transactions

12. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Regulation of E-cash U.S. Constitution reserves the right to issue to the federal government, and not the states “Private” money is allowed Banks taking deposits are subject to extensive federal or state regulation, other issuers of e-cash may not be

13. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Money Transmitters Entities other than banks may be money transmitters 40 states have laws dealing with money transmitters Uniform Money Services Act –would apply to Internet payment systems –requires licensure, examination, reporting and record keeping

14. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Fund Transfer Act (EFTA, 1978), 15 U.S.C. §1693ff.15 U.S.C. §1693ff. Protects consumers (individuals) in electronic banking transactions Implemented by Federal Reserve Regulation E (12 C.F.R. §205.1). (Many state versions also.)12 C.F.R. §205.1 Any transfer of funds which is initiated through an electronic means to credit or debit an account: –(1) Point-of-sale transfers –(2) ATM transfers –(3) Direct deposits or withdrawals of funds (ACH) –(4) Transfers initiated by telephone –(5) Debit card transactions

15. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS EFTA (cont.) Regulation E requires: –disclosure of terms –receipt for transaction, periodic statements –limited consumer liability for unauthorized transactions: $50 if reported within 2 business days $500 if reported within 3-60 days unlimited liability after 60 days –error resolution procedure when consumer reports within 60 days of of statement –issuance of access devices only upon consumer request Not clear if Reg. E applies to smart cards

16. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Credit Cards Not covered by EFTA, but by the “Truth in Lending” Act and Federal Reserve Regulation Z (12 C.F.R. §226.1ff.)12 C.F.R. §226.1ff. Primary method of payment for consumer Internet sales Does not apply to credit cards used by businesses Limits consumer liability for unauthorized use to $50 or amount wrongly charged prior to notice, whichever is lower Critical for widespread use of credit cards

17. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Transferable Records (UETA)UETA The law of negotiable instruments (checks, drafts, promissory notes, etc.) pays great attention to transferability and the “holder in due course” (rightful possessor without knowledge of fraud or defect) A negotiable instrument is token money (rightful possession is equivalent to ownership) Negotiable instruments are made electronic through “transferable records” A “transferable record” is an electronic record that would be a negotiable instrument if it were written and which the issuer has expressly agreed is a transferable record.

18. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Transferable Records (UETA)UETA A person ‘controls’ a transferable record if (1) a single authoritative copy of the transferable record exists which is unique, identifiable and,... unalterable; (2) the authoritative copy identifies the controller as either the issuer or as most recent authorized transferee; (3) copies that change the identity of the controller can be made only with the consent of the controller; (4) the status of a copy (authoritative or not authoritative) is readily identifiable. Transferable records have the status of negotiable instruments

19. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Automated Transactions (UETA)UETA “Automated transaction. -- A transaction conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts or records of one or both parties are not reviewed by an individual in the ordinary course [of business].” “A contract may be formed by the interaction of electronic agents of the parties, even if no individual was aware of or reviewed the electronic agents' actions or the resulting terms and agreements.” Difference: automated transaction may be revoked for unilateral mistake if the other side has not changed its position in reliance

20. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Automated Transactions (e-Sign)e-Sign “The term ‘electronic agent’ means a computer program or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part without review or action by an individual at the time of the action or response.” “A contract or other record relating to a transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because its formation, creation, or delivery involved the action of one or more electronic agents so long as the action of any such electronic agent is legally attributable to the person to be bound.”

21. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Wire Transfers Used primarily in business to business transactions Covered by Article 4A4A Commercially reasonable security measures required between bank and customer Complex liability rules for errors, retransmission, etc. in financial messaging systems

22. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Electronic Documents of Title and Letters of Credit Letters of Credit are now issued electronically and by means of the Internet. Revised Article 5 of the UCC allows for this. Documents of Title, e.g. negotiable bills of lading, still must be in writing, so the electronic issuance and negotiation is unclear.

23. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS EU Electronic Money Directive Directive on the Taking-up, Pursuit and Prudential Supervision of Business of Electronic Money Institutions e-money distributor must disclose: –technical requirements to use the system –obligations –liabilities –dates of credits and debits –account charges, –methods of dispute resolution

24. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS EU Electronic Money Directive (cont.) Issuer must provide: –transactional information, electronically if appropriate –method to view 5 previous transactions User must: –keep password safe –notify issuer of any loss or theft User has no right to reverse order Issuer is liable for defective transfers

25. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Major Ideas States cannot create money; the Federal government and private companies can Regulation E covers consumer electronic money transfers Regulation Z covers consumer credit cards UCC Article 4 covers commercial money transfers

26. 45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004 COPYRIGHT © 2004 MICHAEL I. SHAMOS Q A &