Law and Electronic Commerce: The Next Frontier

Ever wonder why some of the largest and most state of the art on-line brokers won’t let you open an account on line without your sending a “hard, written signature”? It’s because there is no uniform law, or certainty, on how to do the simplest bit of commerce in cyberspace—execute an electronic contract. And they’re worried (maybe unreasonably, but worried nonetheless), that their contracts with their customers won’t be honored. Why? Because most commercial activity in this country is governed by state law. How we make contracts, whether a contract is enforceable, and which terms will be honored, is generally governed by state commercial codes and contract law developed by state courts. And much of that law is ancient; it is derived from English common law.

This state-based system could have been a disaster when local commerce became interstate commerce, and interstate commerce became common. There could have been great confusion, uncertainty and increased costs for any contract executed across state lines, or any product or service ordered by mail. But we have lived with these complications and, in fact, our system has worked reasonably well. That’s because, in part, with a common English heritage and a couple of centuries of being challenged and shaped by similar issues, the various states’ laws have generally been pretty uniform. As the law evolved, judges understood the need for certainty and consistency, and the law was able to keep pace with business developments. Additionally, most consumer transactions were, and still are local, we buy what we need from a neighborhood store or office. Finally, if the parties chose a state’s law to govern their contract, another state would traditionally honor that choice, even if there were significant differences in the states’ approaches. But there had to be some reasonable contact with that other state, such as by a party residing there, or by the services under the contract being performed there. And the parties first had to have an enforceable contract.

Technology, and the Internet in particular, now dramatically challenges and changes—at its core—this traditional model. One of the great strengths of cyberspace is its wide open, no standards format. But when it comes to e-commerce, that strength is also a weakness. That is because there is less than perfect certainty as to whether a contract executed in the virtual world will be honored in the real world. Additionally, in cyberspace, there is no easy way to verify addresses or residences or the citizenship of buyers or sellers. They can be in Boston or Boise (or Belgium) with little to distinguish them at the other end of the transaction. So what happens when the law of Massachusetts is very different from the law of Idaho on an issue of importance? What happens when one state recognizes an electronic contract or digital signature but the other may not? And this is no mere academic exercise. A short time ago the idea of a web site reaching millions across the globe was fanciful, today billions of dollars are “commerced” over the net, with no area of business growing as fast. A few years ago no one knew what a web address was, today almost no one advertises anywhere else—in print, TV or radio—without highlighting one.

So what to do with the law—least the basic question of what law applies and whether, therefore, there is a valid contract? There are three possibilities. Let legal rules—ever they are and turn out to be—continue to evolve state-by-state. That would result in the enormous benefits of e-commerce being burdened by continued legal expense and uncertainty. Yes, eventually, state laws will become relatively uniform on these new issues. But unlike the last two hundred years, the migration of consumers to electronic commerce will be a lot faster than the movement from local towards interstate commerce, and the law’s slow progress towards national certainty will be more costly here than in the past.

At the other extreme, we could govern electronic commerce at the Federal level, or even try to promote international standards. But, at present, creating—and keeping up to date—a federal contract code for all of e-commerce will be extraordinarily difficult. There is hardly any federal law relating to contracts, of any type, today, no “Federal Contract Commission” exists, and there is no likelihood that Congress would soon adopt the equivalent of a comprehensive federal commercial code.

Some have suggested that certain specific parts of e-commerce—such as digital signature procedures—be federalized. And legislation has been introduced reinforcing that suggestion. Still others have suggested that Federal agencies, such as the Securities and Exchange Commission, set contract law and similar standards for the industries they regulate. But the first approach would create a hodge-podge of piece-meal or conflicting, and eventually stale, laws that overlay state laws. And, it carves out only a few parts of what’s important to e-commerce. Moreover, as the technology changes, is Congress going to be able—and willing—to revise the law quickly enough to ensure it is up to date? And what happens if one party uses an old-fashioned ballpoint pen and the other contracts with digital signature technology—do we mix and match state and federal requirements?. As for the second approach of regulated industries having special contracting privileges, it results in no federal law—and no certainty—for non-regulated industries, potential conflicts between the regulators, and favoritism for certain industries.

None of this would solve the problem.

There is a better course in between, however. That approach recognizes that the goal is not necessarily uniformity in all the laws, but certainty in contracting. A federal law could dictate that if a contract specifies that a certain state’s law should govern that contract, then that choice controls (with a default if the contract doesn’t specify). Such a federal choice of law provision would control no matter where the parties to the contract were resident (at least in the U.S.), no matter where the contract was to be performed and regardless of whether there were any contacts at all in the traditional sense with the chosen state. This would ensure that, if a contract was legal and enforceable under the laws of a specific state if made electronically or otherwise, then that state’s law could be chosen—and the contract’s enforceability would be certain. It would also obviate the cumbersome, fact-intensive analysis that state courts usually perform to decide whether the parties’ specified choice of law will be honored. It would then be left to the parties—and the states—to continue as they have since the founding of the country to develop the laws needed to facilitate commerce.

Under such a system, some states would develop a body of law that buyers and sellers, businesses and consumers would find comprehensive, balanced and up-to-date and consistently modified as the frontier changes. Want to use digital signatures in an electronic contract? One state or another will provide for the appropriate, state of the art procedures and safeguards to ensure their utility. Want to have a contract made by e-mail? A state’s law would ensure that it was enforceable. Such rapid evolution would be similar to what has happened with the body of laws that govern corporations. Most companies are incorporated under the laws of just a few states – not because that is where the founders or their lawyers reside, but because these laws are known to be thoughtful, consistently updated and expertly administered. (And, of course, the states have an incentive to do maintain their laws because of their importance and the fees they receive from companies’ incorporating in the state.) For e-commerce law, consumer groups and lawyers would monitor state laws and influence them, as would business. With clearer laws, backed by a federal choice of law provision that would ensure that the parties’ choice will in fact be enforceable, costs and uncertainty would be substantially reduced. In addition, diversity and innovation would be fostered as different approaches are tried in different states, but because businesses, membership organizations, publications or others doing business nationwide could pick one state’s law, costs of complying with fifty disparate state laws would be eliminated.

Any state law that tilted too much towards business would find consumers not using it as consumer groups alerted others not to do business with any merchant who selected that state’s law. Similarly, any state law that tilted too much towards consumers would find business not using it. Alerts as to biased laws would be provided by the media and Web sites. Just as happens with corporate law, a reasonable balance would be achieved, since it is everyone’s long-term interest to have fair laws.

Would this be the perfect solution if one were starting all over again? No. But we write on a heavily scribbled slate. We can wait for the perfect solution, but it will be a long time in coming. Meanwhile, the promise of electronic commerce and new technologies can be realized, or at least significantly promoted, by a very simple law that could be quickly adopted now at the federal level, that empowers the states to do more effectively what they have been doing for centuries.

Mrs. Wallman is president of Wallman Strategic Consulting, LLC, a telecommunications policy consulting company, and was formerly a senior National Economic Council and Federal Communications Commission official.