New Laws for the Digital Age.

With the rapid growth of electronic commerce, the states need a legal framework that will provide clear, consistent rules for the new world of e-business.

Two new uniform acts dealing with electronic information and transactions were recently approved by the National conference of commissioners on Uniform State Laws and are ready for consideration by the states.

One--the Uniform computer Information Transactions Act (UCITA--is based on the need for rules to govern the sale of computer information. Over the past few decades, computer software has been sold with a "shrink-wrap" or "click-wrap" license, which the consumer is able to read only after purchase. Unlike the sale of a tangible good, such as a car, a license agreement does not transfer title to the software, instead it "buys" a limited use of the product.

In essence, the act establishes rules for creating, modifying, transferring or licensing computer information. This includes the purchase of computer software, as well as other information such as computer games, on-line databases, multimedia products and the distribution of information on the Internet.

UCITA was originally drafted as part of the Uniform Commercial Code (UCC). In the spring of 1999, amid much controversy, the commissioners redrafted it as a freestanding act.

John McCabe, legislative director of the National Conference of Commissioners on Uniform State Laws, says it became a lightning rod because it was the first uniform law governing licensing contracts. Software is an intangible product, not a tangible good like those governed by the UCC. Unlike the commercial code rules, which had a history in common law before they became part of the uniform code, the UCITA explores new territory. The uniform law commissioners adopted it last summer.

Critics charge that the act fails to provide sufficient protection for consumers because they don't get a chance to look at the license and can't negotiate terms for use of the product before they spend their money. And they fear computer information providers may enforce unreasonable terms because they contend UCITA provides limited rights and warranties for consumers.

"Consumers would be much better served by certain rules that straightforwardly protect their reasonable interests and expectations, explains Jean Braucher, University of Arizona law professor. "Far from creating greater legal certainty, UCITA would require decades of litigation to sort out its meaning."

Supporters of the act counter that software licensing offers flexibility in a rapidly exploding industry. They point out that the act follows basic contract law. When license terms are unavailable for review before payment and delivery, it mandates that buyers have the right to a cost-free refund if the terms are not acceptable. The act extends warranty rules to all software licenses and requires a conspicuous warranty disclaimer.

Marc Pearl, senior vice president of government affairs and general counsel for The Information Technology Association of America, explains that UCITA is urgently needed to keep the country's economic engine running. "It lays down fair, clear rules that provide greater certainty and uniformity than current law."

The second measure, the Uniform Electronic Transactions Act (UETA), puts electronic and paper-based commerce on the same legal footing. It gives electronic signatures or records the same validity and enforceability as manual signatures and paper-based transactions. It doesn't make electronic transactions mandatory--it simply provides a framework to make them legal when they are used. The act allows the use of electronic records and electronic signatures in any government or business transaction except those subject to the UCC. It is designed to fit with existing state law.

The act defines electronic signatures in a technology-neutral way. It is worded broadly enough to encompass sounds, symbols or processes, that would include mouse-clicks, digitally encrypted signatures, a name at the end of an e-mail, electronic water marks, etc., when executed by a person who has the intent to "sign." In addition, it authorizes state governments to "create, generate, communicate, store, process, use and rely upon electronic records and signatures."

California was the first state to pass UETA. Some important improvements for consumers were added to the California law, according to Gail Hillebrand of the Consumers Union. The act allows states to exempt specific laws from its general rule that permits electronic records and signatures to replace written ones. California excluded several categories of statutes: those requiring specific text to be separately signed, those affecting rights or restraining particular activities, and those with special notice requirements triggering legal rights. In addition, the California law included several new provisions, such as restricting UETA only to agreements where the decision to communicate electronically has been made electronically. The state added the right to revoke the OK to receive communications electronically.

At a recent NCSL conference, Marybeth Stevens with the American Council of Life Insurance stressed the importance of having a uniform state approach to electronic signatures and records in order to support e-business transactions in the next century. She encouraged states to adopt UETA immediately so that federal legislation would not be necessary.

"Economic commerce does not recognize geopolitical boundaries," says Patricia B. Fry, law professor at the University of North Dakota and chair of the UETA drafting committee. "This act provides a solid legal framework to allow for the continued development of innovative technology to facilitate electronic transactions. When the states enact UETA, we will have a stable base that will allow e-business to move forward."

How to provide a legal structure that will foster e-commerce is clearly a major issue for state policymakers. The drafters of both of these new uniform acts, UETA and UCITAz, envisioned these laws as an important part of the legal infrastructure necessary to advance e-business. By the end of 1999, UETA was passed by two states--California and Pennsylvania-- and several states had conducted hearings to consider one or both of these new uniform acts. But the majority of state legislative deliberation will take place this session.

A LITTLE ABOUT NCCUSL 

The National Conference of Commissioners on Uniform State Laws is a nonprofit, unincorporated association of commissioners on uniform laws from the 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The primary task of the more than 300 commissioners, most of whom are practicing lawyers, judges and law professors, is to determine which areas of the law would benefit from uniformity. They then write and recommend uniform laws to state legislatures for enactment. Since its creation in 1892, the NCCUSL has written more than 200 uniform laws, including the Uniform Partnership Act, Uniform Trade Secrets Act, Uniform Probate Code and Uniform Limited Partnerships Act. The most well-known uniform act is the Uniform Commercial Code, a joint project with the American Law institute. www.nccusl.org

STATS ON INTERNET AND ELECTRONIC BUSINESS

* People on the Internet --In 1994, 3 million; in 1998, 100 million (half of all U.S. adults); by 2005, an estimated 1 billion worldwide.

* Internet financial services--More than 6 million U.S. residents have access to Internet financial transactions, including on-line banking and brokerage accounts.

* Web sites--There are more than 3.6 million commercial Web sites in the United States alone, and 275,000 are being added each month.

* Internet retail sales--E-commerce sales are projected to rise from $40 billion to $80 billion by 2002.

* Business-to-business Internet sales--Business to business sales on the Internet are expected to hit $1.3 trillion by 2002.

CONGRESS BENT ON ITS OWN LAW FOR ELECTRONIC SIGNATURES

As with many issues involving electronic commerce, the states have been the "laboratories of democracy"--42 of them had enacted some form of digital signature legislation by the end of 1999.

Now Congress is getting into the act with both houses passing a version of electronic signature legislation. Although both refer to the Uniform Electronic Transaction Act, the consequences for the states are very different. S 761, sponsored by Michigan Senator Spencer Abraham, preempts current law in states that have not yet passed the uniform act, creating equal legal status for electronic and written signatures. S 761 allows states to pass UETA or similar legislation to reestablish the jurisdiction of state law.

HR 1714, sponsored by Representative Tom Bliley of Virginia, contains more broad preemptions and includes language to create a national standard for digital records. HR 1714 preempts laws in every state, even those that have already passed the uniform act. The House bill threatens state consumer protection laws, particularly those that require paper notifications to consumers. Furthermore, HR 1714 would compel states to accept required records electronically without the ability to set rules on the form or software used to deliver such records.

Members at the NCSL winter meeting in Washington, D.C., in December voted unanimously to endorse the language in the Senate bill, and oppose the House bill. Currently, the two versions are waiting to be reconciled in a conference committee, which is expected to be appointed early this session.

Graham Williams, NCSL