Lecture 10:
Internet Payment Systems
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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?
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“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)
– 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."
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Electronic Transactions
• Pennsylvania Electronic Transactions Act (signed
12/16/99). A version of the Uniform 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.”
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Digital Signature Legislation
• Electronic Signatures in Global and National
Commerce Act (effective October 1, 2000)
• “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)
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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.
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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
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Soma v. Standard Chartered Bank
• Soma Medical International v. Standard Chartered Bank, 196 F.3d
1292 (10th Cir. 1999). 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”
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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
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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
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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
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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
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Electronic Fund Transfer Act
(EFTA, 1978), 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.)
• 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
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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
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Credit Cards
• Not covered by EFTA, but by the “Truth in Lending”
Act and Federal Reserve Regulation Z (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
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Transferable Records (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.
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Transferable Records (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
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Automated Transactions (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
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Automated Transactions (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.”
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Wire Transfers
• Used primarily in business to business transactions
• Covered by Article 4A
• Commercially reasonable security measures required
between bank and customer
• Complex liability rules for errors, retransmission, etc.
in financial messaging systems
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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.
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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
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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
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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
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Q&A
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