United States District Court

CONCLUSION
For the foregoing reasons, we affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.

UETA, UCITA, and E-Sign

Richard Warner

1. 
   UETA
   

The NCCUSL drafted the Uniform Electronic Transactions Act (UETA) to promote uniformity in the regulation of electronic contracting and to resolve legal uncertainties about the statue of such contracts. The NCCUSL emphasizes that “the purpose of UETA is to remove barriers to electronic commerce by validating and effectuating electronic records and signatures. It is NOT a general contracting statute—the substantive rules of contracts remain unaffected by UETA.” Uniform Electronic Transactions Act, Prefatory Note, National Conference of Commissioners on Uniform State Laws (1999). As of 2006, forty-eighty states had adopted UETA according to the NCCUSL.

Uniform Electronic Transactions Act

SECTION 3. SCOPE.

(a) Except as otherwise provided in subsection (b), this [Act] applies to electronic records and electronic signatures relating to a transaction.

(b) This [Act] does not apply to a transaction to the extent it is governed by:

(1) a law governing the creation and execution of wills, codicils, or testamentary trusts;

(2) [The Uniform Commercial Code other than Sections 1-107 and 1-206, Article 2, and Article 2A];

(3) [the Uniform Computer Information Transactions Act]; and

(4) [other laws, if any, identified by State].

(c) This [Act] applies to an electronic record or electronic signature otherwise excluded from the application of this [Act] under subsection (b) to the extent it is governed by a law other than those specified in subsection (b).

(d) A transaction subject to this [Act] is also subject to other applicable substantive law.

Comment

. . .

7. This Act does apply, in toto, to transactions under unrevised Articles 2 and 2A. There is every reason to validate electronic contracting in these situations. Sale and lease transactions do not implicate broad systems beyond the parties to the underlying transaction, such as are present in check collection and electronic funds transfers. Further sales and leases generally do not have as far reaching effect on the rights of third parties beyond contracting parties, such as exists in the secured transactions system. Finally, it is in the area of sales, licenses, and leases that electronic contracting is occurring to its greatest extent today. To exclude these transactions would largely gut this Act.
Notes and Questions

1. As Comment 7 makes clear, one of the fundamental goals of UETA is to “validate contracting” in the sale of goods and in lease transactions. UETA does not however, resolve the offer and acceptance issues that make some question the enforceability of shrinkwrap and clickwrap contracts, nor does it address the claims, discussed infra in Section D, that certain crucial provisions in software licenses are unenforceable because Federal copyright law preempts the applicable state contract law. But does anything else need validating? As Caspi v. Microsoft illustrates, electronic contracts formed by affirmative indicating assent prior to purchase are clearly enforceable under pre-UETA contract law. Consider UETA Section 7 in this regard.

SECTION 7. LEGAL RECOGNITION OF ELECTRONIC RECORDS, ELECTRONIC SIGNATURES, AND ELECTRONIC CONTRACTS.

(a) A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b) A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c) If a law requires a record to be in writing, an electronic record satisfies the law.

(d) If a law requires a signature, an electronic signature satisfies the law.
Notes and Questions

1. The law often requires writings and signatures. Illinois, for example, has over 3000 statutory sections requiring a signed writing. UETA does resolve uncertainty about whether an electronic signature on an electronic record satisfies these requirements.

2. 
   UETA
   

UETA also resolves uncertainties about what counts as an electronic signature. UETA’s provisions in this regard are virtually identical to The Electronic Signatures in Global and National Commerce Act (ESIGN), 17 U.S.C. § 7006.

3. 
   ESIGN
   

Conducting business via the exchange of electronic documents typically saves considerable time and money; consequently, it is important to know when an electronic signature on a document is legally binding. The states responded by passing laws that recognized the legal validity of an electronic signature; the laws vary considerably and thus pose a problem for businesses with national scope. To resolve this lack of uniformity, Congress passed The Electronic Signatures in Global and National Commerce Act (ESIGN), 17 U.S.C. § 7006.

ESIGN resolved a difference among the states in their treatment of an “electronic signature.” §106 of ESIGN defines an electronic signature and related terms.

a. Electronic versus digital signatures

§106. Definitions.

. . .

(2) ELECTRONIC- The term ‘electronic’ means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(3) ELECTRONIC AGENT- 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.

(4) ELECTRONIC RECORD- The term ‘electronic record’ means a contract or other record created, generated, sent, communicated, received, or stored by electronic means.

(5) ELECTRONIC SIGNATURE- 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.

b. Digital signature technology

Under §106(5), a typed name at the end of an e-mail, a graphic of a signature, or any other electronic item is a signature as long as it is “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.” Some states had adopted statutes that require the use a specific technology for electronic signatures. This technology is commonly referred to as a digital signature. A digital signature is an electronic signature in the ESIGN sense, but not every electronic signature is a digital signature. Walking through the steps of digitally signing an e-mail illustrates the relevant technology. Suppose Alice wishes to digitally sign the e-mail she is about to send to Bob. Provided Alice has the necessary software on her computer, all she has to do to sign the e-mail digitally is click on the “digitally sign” icon. You need to understand three things the computer does to understand some of the motives behind ESIGN.

First: the computer applies a “hash function” to the message. This is a program that turns the message into a shorter alphanumeric sequence (a sequence of letters and numbers). Suppose Alice’s message is, “Hi, Bob. Hope all is well. Alice,” and suppose that the hash function turns this into the alphanumeric sequence “a29zz878.” Different messages produce different sequences. Second: the computer combines the alphanumeric sequence with a special series of numbers known as “Alice’s private key.” Do not worry yet about where Alice gets her private key. Third: the computer encodes the combination using an “encryption algorithm,” and attaches the result to the e-mail. Here is a very simple encryption algorithm: replace every letter, with the letter that follows it in the alphabet; replace every number with next larger number. Actual encryption programs are vastly more complicated.

The attached encrypted file is Alice’s signature. To see why this is a signature, you need to understand what Bob does when he receives the e-mail. Now, what Bob really does is just click on “decrypt,” but, as with Alice, we need to understand what Bob’s computer does. First: it combines the encrypted file with a special sequence of numbers called “Alice’s public key.” Do not worry yet about where Bob gets Alice’s public key. Second: the computer applies the encryption program (the same one Alice used) to the combination of the public key and the encrypted files. The result is the alphanumeric sequence “a29zz878” the same sequence Alice’s computer produced by running the hash function on “Hi, Bob. Hope all is well. Alice.” Third: Bob’s computer also runs the hash function on that message and it also gets the sequence “a29zz878.” As a result, Bob knows two things: (a) the message is from Alice; (b) it has not been altered in transmission. He knows the message is from Alice because the only items Bob can decrypt using Alice’s public key are items encrypted with her private key. So when the encryption program succeeds in decrypting the attached file, Bob knows that Alice is the one who encrypted that file. This is why the file is a signature. Just as she does when she signs a paper document, Alice attaches an identifying mark to her e-mail when she attaches the encrypted file. Bob gets more than just an identifying mark, however. When the hash function results match, he knows the message was not altered during transmission (because no two messages have the same hash function result).

Now, where does Alice get her private key? And Bob, the corresponding public key? Public/private key pairs are issued by certification authorities (VeriSign is a major one; see www.verisign.com). When Alice wants a key pair, she requests it from a certification authority; the authority verifies that Alice is indeed who she claims to be, and issues her an (electronically stored) key pair. Alice carefully guards her private key so that only she has access to it, but she allows the entire world to have access to her public key, which they may obtain from the certification authority (or from Alice herself). The public key is accompanied by a certificate (in the form of an electronic record) that attests that the public key was issued to Alice.

Terminology: The use of key pairs issued by certification authorities is often referred to as “public key encryption.” The certificate authorities, and the use of key pairs they support, are typically referred to as “public key infrastructure” (PKI).

c. ESIGN and public key encryption

Some state statutes mandated or favored the use of public key encryption; some states did not. In the interest of uniformity, ESIGN preempts statutes that are not technology neutral. 15 USC §7002(a)(2)(A)(ii), 15 USC §7002(a)(2)(B). States may still require public key encryption for state procurement (15 USC §7002(b)) and for filing documents with the state (15 USC §7004(a)).

d. Problems with public key encryption

Failure to verify identity. Certification authorities do not always carefully verify the identity of those requesting key pairs. Some will issue a key pair on the basis of an online application in which the person applying merely supplies a name. The story has circulated for years that one well-known certificate authority issued two fraudulently requested certificates in the name of “Microsoft.”

Failure to safeguard private keys. When describing Alice and Bob, we assumed that Alice carefully safeguarded her private key. Holders of private keys often do not. They often store them on their hard drives. This is convenient because the computer needs to access the private key in the process of encryption, but it is also unsafe as hackers may steal the key. Anyone who steals Alice’s key can masquerade as Alice. The reason: what Bob really knows when he succeeds in decrypting the file Alice attached to her e-mail is that the file was attached by someone in possession of Alice’s private key; he only knows that that person is Alice is he is sure that she is the only one using her private key.

Failure to maintain revocation lists. If Alice’s private key is stolen, or if she wishes to cease using it for any reason, Alice can revoke the associated public key. Certification authorities maintain revocation lists that users may consult to determine whether a public key is still valid. Unfortunately, these lists up to date are often not up to date.

Failure to check revocation lists. Users of public keys often do not check revocation lists to determine if the public key they are using is still valid.
4. The Mailbox Rule
International Convention of Sale of Goods
Acceptance is effective on receipt.
Article 18
(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

(2) An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.

(3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph.
The offeror’s power to revoke ends upon dispatch of the acceptance.
Article 16
Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.

Uniform Electronic Transactions Act
UETA is typically interpreted as altering the mailbox rule so that acceptance is effective on receipt, where receipt is defined as below.
UETA 114 (b): "Unless otherwise agreed between the sender and the recipient, an electronic record is received when it enters an information processing system (1) that the recipient has designated or uses for the purpose of receiving electronic records or information of the type sent; (2) in a form capable of being processed by that system; and (3) from which the recipient is able to retrieve the electronic record." 
SECTION 203. OFFER AND ACCEPTANCE IN GENERAL.

Unless otherwise unambiguously indicated by the language or the circumstances, the following rules apply:

(1) [Manner of acceptance.] An ofer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances.
. . .
(4) [Electronic acceptance.] If an ofer in an electronic message evokes an electronic message acceptng the ofer, a contract is formed:

(A) when an electronic acceptance is received; or

(B) if the response consists of beginning performance, full performance, or giving access to informaton, when the performance is received or the access is

enabled and necessary access materials are received.

Douglas v. Talk America

495 F.3d 1062 (9^th Cir. 2007)

PER CURIAM:

We consider whether a service provider may change the terms of its service contract by merely posting a revised contract on its website.

Facts

Joe Douglas contracted for long distance telephone service with America Online. Talk America subsequently acquired this business from AOL and continued to provide telephone service to AOL's former customers. Talk America then added four provisions to the service contract: (1) additional service charges; (2) a class action waiver; (3) an arbitration clause; and (4) a choice-of-law provision pointing to New York law. Talk America posted the revised contract on its website but, according to Douglas, it never notified him that the contract had changed. Unaware of the new terms, Douglas continued using Talk America's services for four years.

After becoming aware of the additional charges, Douglas filed a class action lawsuit in district court, charging Talk America with violations of the Federal Communications Act, breach of contract and violations of various California consumer protection statutes. Talk America moved to compel arbitration based on the modified contract and the district court granted the motion. Because the Federal Arbitration Act, 9 U.S.C. § 16, does not authorize interlocutory appeals of a district court order compelling arbitration, Douglas petitioned for a writ of mandamus.
Analysis

Because a writ of mandamus is an extraordinary remedy, we have developed five factors that cabin our power to grant the writ:

1. “The party seeking the writ has no other adequate means, such as a direct appeal, to attain the relief he or she desires.”
2. “The petitioner will be damaged or prejudiced in a way not correctable on appeal.”
3. “The district court's order is clearly erroneous as a matter of law.”
4. “The district court's order is an oft-repeated error, or manifests a persistent disregard of the federal rules.”
5. “The district court's order raises new and important problems, or issues of law of first impression.”
Bauman v. U.S. Dist. Court, 557 F.2d 650, 654-55 (9th Cir.1977).
The third factor is a necessary condition for granting a writ of mandamus. Executive Software N. Am., Inc. v. U.S. Dist. Court, 24 F.3d 1545, 1551 (9th Cir.1994). But “all five factors need not be satisfied at once.” Valenzuela-Gonzalez v. U.S. Dist. Court, 915 F.2d 1276, 1279 (9th Cir.1990). If the district court clearly erred, we determine whether the four additional factors “in the mandamus calculus point in favor of granting the writ.” Executive Software, 24 F.3d at 1551.
1. Douglas alleges that Talk America changed his service contract without notifying him. He could only have become aware of the new terms if he had visited Talk America's website and examined the contract for possible changes. The district court seems to have assumed Douglas had visited the website when it noted that the contract was available on “the web site on which Plaintiff paid his bills.” However, Douglas claims that he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America's website to pay his bills. Even if Douglas had visited the website, he would have had no reason to look at the contract posted there. Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.^FN1 Indeed, a party can't unilaterally change the terms of a contract; it must obtain the other party's consent before doing so. Union Pac. R.R. v. Chi., Milwaukee, St. Paul & Pac. R.R., 549 F.2d 114, 118 (9th Cir.1976). This is because a revised contract is merely an offer and does not bind the parties until it is accepted. Matanuska Val Farmers Cooperating Ass'n v. Monaghan, 188 F.2d 906, 909 (9th Cir.1951). And generally “an offeree cannot actually assent to an offer unless he knows of its existence.” 1 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 4:13, at 365 (4th ed.1990); see also Trimble v. N.Y. Life Ins. Co., 234 A.D. 427, 255 N.Y.S. 292, 297 (1932) (“An offer may not be accepted until it is made and brought to the attention of the one accepting.”). Even if Douglas's continued use of Talk America's service could be considered assent, such assent can only be inferred after he received proper notice of the proposed changes. Douglas claims that no such notice was given.
FN1. Nor would a party know when to check the website for possible changes to the contract terms without being notified that the contract has been changed and how. Douglas would have had to check the contract every day for possible changes. Without notice, an examination would be fairly cumbersome, as Douglas would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed.
. . .
The district court thus erred in holding that Douglas was bound by the terms of the revised contract when he was not notified of the changes. The error reflects fundamental misapplications of contract law and goes to the heart of petitioner's claim. It would alone be sufficient to satisfy the third Bauman factor, but the district court also committed two additional errors. Even if Douglas were bound by the new terms of the contract (which he is not for the reasons already explained), the new terms probably would not be enforceable in California because they conflict with California's fundamental policy as to unconscionable contracts. In New York, as in California, a contract is unconscionable only if it is both procedurally and substantively unconscionable. That's where the similarities end. The district court erred in analyzing California law as to both procedural and substantive unconscionability.

The district court held that the arbitration clause in the modified contract is not procedurally unconscionable (and therefore enforceable) because Douglas had meaningful alternative choices for telephone service. Under New York law this choice forecloses any procedural unconscionability claim. See Ranieri v. Bell Atl. Mobile, 304 A.D.2d 353, 759 N.Y.S.2d 448, 449 (2003). However, after the district court made its ruling, we noted that California “has rejected the notion that the availability ... of substitute ... services alone can defeat a claim of procedural unconscionability.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1283 (9th Cir.2006) (en banc). In California, a contract can be procedurally unconscionable if a service provider has overwhelming bargaining power and presents a “take-it-or-leave-it” contract to a customer-even if the customer has a meaningful choice as to service providers. Id. at 1284.

Likewise, the district court held that the class action waiver provision is not substantively unconscionable. Such waivers aren't substantively unconscionable under New York law. . . . but the California Court of Appeal in Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1455 n. 13, 48 Cal.Rptr.3d 813 (Ct.App.2006), expressly disavowed Provencher. A class action waiver provision thus may be unconscionable in California. Whether it is depends on the facts and circumstances developed during the course of litigation. The district court clearly erred in holding that the clauses (assuming that they are part of the contract at all) are consistent with California policy and therefore enforceable as a matter of law.

Henningsen v. Bloomfield Motors, Inc.

161 A.2d 69 (N.J. 1960)
Plaintiff Claus H. Henningsen purchased a Plymouth automobile, manufactured by defendant Chrysler Corporation, from defendant Bloomfield Motors, Inc. His wife, plaintiff Helen Henningsen, was injured while driving it and instituted suit against both defendants to recover damages on account of her injuries. Her husband joined in the action seeking compensation for his consequential losses. The complaint was predicated upon breach of express and implied warranties and upon negligence. At the trial the negligence counts were dismissed by the court and the cause was submitted to the jury for determination solely on the issues of implied warranty of merchantability. Verdicts were returned against both defendants and in favor of the plaintiffs. Defendants appealed and plaintiffs cross-appealed from the dismissal of their negligence claim. . . .