Legal Implications Of Blockchain In Supply Chain: What’s Law Got To Do With It? – Technology | #itsecurity | #infosec


The advent of new technology brings along with it the murkiness
of how the American legal system will treat such technology. 
Before the rise of blockchain for instance, businesses were
uncertain how courts would treat electronic records and signatures
until the federal legislature enacted the E-Sign Act on June 30,
2000.1 To provide even more clarity
to businesses, the National Conference of Commissioners on Uniform
State Laws drafted the Uniform Electronic Transactions Act (the
UETA“)2
to provide states with a framework to enact laws governing the
enforceability of electronic records and signatures.  Now,
almost every state in the U.S. has adopted some form of the UETA,3 and industry heavily relies on
electronic contracting.

The legislative process has already begun for blockchain
technology. Arizona and Tennessee both enacted laws stating that
(1) a blockchain technology signature is considered an electronic
signature, and (2) a blockchain technology record is considered an
electronic record.  Further, these laws say that courts may
not deny a contract legal validity because the contract contains a
“smart contract” term.4  Other states are also
attempting to adapt their current commercial laws to blockchain
technologies.  Wyoming, for example, is breaking ground by
addressing blockchain’s impact on the attachment, perfection,
and priority rules of Article 9 of the Uniform Commercial Code.5  Similarly, Delaware and
Maryland have amended their general corporation and limited
liability company laws to permit the use of blockchain technologies
for creating and maintaining company records with respect to equity
interests.6

Beyond when and how legislatures and courts will solidify
blockchain technology as a valid platform for contracting, there
are other possible legal questions and ramifications for the use of
blockchain in the supply chain. Some possible areas of legal
considerations follow below.

Potential Modifications to Contract Terms in Supply
Agreements

As companies begin to implement blockchain solutions, drafters
should give thought as to what contract terms to adjust in supply
agreements and other commercial contracts related to the use of
blockchain in the supply chain.  Some potential modifications
to consider follow:

Blockchain Governance

Parties to a supply agreement will need to decide whether a
supply agreement should detail which transactions can (or must)
occur on the blockchain, or whether the parties should set forth
which transactions should occur on the blockchain in a separate
agreement governing the implementation, governance, funding and
maintenance of the supply chain blockchain. Flexibility will be
important as blockchain technology continues to evolve and becomes
more prevalent, so it may be most practical for both parties to
execute an addendum listing transactions that the parties can agree
to update.

Requirements on Suppliers and Sub-suppliers

A buyer may consider whether it would be beneficial to
contractually require its suppliers to join the buyer’s supply
chain blockchain.  A buyer could take this approach a step
further and extend it to sub-suppliers as well. A contract could
require both the supplier and its suppliers to join the buyer’s
supply chain blockchain, which would provide the buyer a deeper
visibility into its supply chain. For smaller suppliers and
sub-suppliers, the ability to keep up and participate in this
evolving area may present a challenge that impacts their ability to
compete for certain business.

Confidentiality

With multiple member blockchains, the parties may want to
explicitly state whether or not a receiving party adding certain
confidential information of a disclosing party to the blockchain
would be considered a permitted disclosure by the receiving
party.  The parties must also consider the contract’s
provisions on removal and return of confidential information at the
end of a contract with the immutability of blockchain in mind.

Purchase Orders and Payment Terms

If a buyer must place purchase orders or releases through the
blockchain system, the parties will need to revise the ordering
mechanism of the contract to reflect this process. 
Additionally, if the parties plan to handle payment by blockchain
smart contracts, the parties will need to revise the traditional
approach of invoicing after shipment and paying within a certain
period to account for the terms of any smart contract.

Product Acceptance

If the buyer will make payment automatically via smart contract
at the time of product acceptance, the supply agreement should be
very precise as to when product acceptance occurs.

Indexing and Shipping Costs

Many supply chain contracts use some form of indexing for raw
materials or other cost inputs to adjust pricing periodically.
Blockchain has the potential to significantly streamline this
process by allowing parties to modify contract pricing that is
linked to an index faster and easier by using a smart contract to
rewrite the new price to the ledger and automatically update
payments via blockchain based on the new contract pricing. Although
traditionally raw materials have been the focus of indexing
provisions, given the recent massive fluctuations in freight and
container costs, contracting parties can share risk for fluctuating
shipping costs by indexing through blockchain technology as
well.

Force Majeure

When drafting force majeure provisions, the parties may want to
explicitly define whether issues with the blockchain such as smart
contract malfunction or compromise of a party’s access to the
blockchain would be considered a force majeure event that can be
relied upon by a party to excuse from performance under the
contract. In most cases, parties may want to align this issue with
whether existing language covers IT system issues.  If such
issues are included as force majeure events, the
parties should consider adding a threshold requirement that a party
cannot claim force majeure for issues resulting from the
party’s own failure to maintain industry-appropriate protective
measures.

Effect of Termination

In the event of termination of a supply agreement, the parties
will want to explicitly set forth any requirements to unwind the
blockchain or terminate the related smart contracts. Alternatively,
the effect of termination provisions could point to a separately
executed agreement specifically dedicated to blockchain governance
which would cover the rights and responsibilities of the parties if
the supply agreement dictates the parties must unwind the
blockchain.

Conflicts

In the resolving conflicts section of the supply agreement,
which provides the order of precedence of contract terms in the
event of conflicting language, the parties should detail how to
resolve a conflict between a coded smart contract or other
blockchain terms and conditions and the text of the supply
agreement.

Entire Agreement

When drafting the entire agreement section of a supply
agreement, the parties will want to identify what, if any, terms
and conditions set forth in the applicable blockchain network are
part of the agreement between the parties and then provide that all
other terms are not part of the agreement.

Service Level Credits

For logistics agreements, the parties may want to define key
performance indicators (KPIs) or service level agreements (SLAs)
based on data from the blockchain, because that data is considered
trusted.  For instance, the parties could define processing
time to receive inventory to a warehouse (i.e.
“dock-to-stock” time) as the difference between the date
and time of receipt of product at the warehouse and the date and
time of stock of product in the warehouse, in each case, based on
the data uploaded by any applicable IoT device to the supply chain blockchain.

Data Privacy Considerations for Blockchain

While blockchain is considered a highly secure means of data
storage, paradoxically, some of blockchain’s other attributes
(being decentralized and immutable), pose a
compliance barrier with many data privacy regulations, such as the
California Consumer Privacy Act of 2018 (Cal. Civ. Code §
1798.105) (“CCPA“) and the EU’s
General Data Protection Regulation
(“GDPR“). 

Blockchain’s decentralized platform makes it tricky to
determine which privacy laws apply.  The nature of a
decentralized platform permits processing of an individual’s
information in any number of locations around the world, because an
individual’s personal data (such as a person’s full name,
social security number, or email address) could be located on
different nodes, each of which could exist in a
different jurisdiction.  As each jurisdiction regulates the
processing of personal data differently, attempting to manage the
plethora of privacy laws, some of which may conflict with others,
could be a daunting, if not impossible and cost-prohibitive
effort.

The immutable nature of blockchain also poses a potential issue
for data privacy.  For instance, Article 17 of the GDPR as
well as the CCPA set forth the “right to be
forgotten.”  The GDPR and CCPA require that processors of
personal data erase the personal data of a person under certain
circumstances, including if the person withdraws consent for the
processing of their personal data.7

Because of the decentralized and immutable nature of
blockchains, some potential approaches to handling personal data
related to transactions on the blockchain are to store the personal
data completely off the blockchain, or store only a hash of the personal data (a one-way
mathematic function that represents the personal data, but from
which the personal data cannot be determined) on the blockchain
while storing the actual data on a private encrypted database.  Taking another
approach, programmers could write smart contracts to allow for the
revocation of access rights or deletion of information on the
blockchain.8  Companies would
have to customize any supply chain blockchain solution for data
privacy compliance issues based on what personal data will be
stored, what jurisdictions the data will be stored in, and the
nature of the related blockchain concept.

Smart Contracts

Smart contracts are not necessarily contracts in the traditional
sense.  Rather, a smart contract is a computer program stored
on a blockchain that performs an action when triggered by an event.
Smart contracts take the agreement of two adverse parties to the
next level.  When two parties execute a traditional written
agreement, they are promising to act in accordance in that
agreement.  When two parties implement a smart contract, it is
not a mere promise; they have already effected an
outcome. 

As previously discussed, certain states such as Arizona and
Tennessee have laid the groundwork for courts to enforce smart
contracts.  If blockchain continues to become more prevalent
in business, the need for decisive regulations will pressure other
states to follow suit and address smart contracts through
legislation.

See Article 5 of this “Blockchain in
Supply Chain” series for more information on smart
contracts. 

Antitrust Considerations for Blockchain

Blockchain provides an avenue for competitors to cooperate,
particularly in a consortium or other permissioned structure.  As with any
collaboration or joint venture among competitors, such
collaboration raises potential antitrust risks and can create a
slippery slope to claims of collusion and anticompetitive
exclusionary conduct, among other anticompetitive practices.

For most blockchain collaborations among actual or potential
competitors, the greatest practical antitrust risk involves
collusion and implicates Section 1 of the Sherman Act.9  Section 1 prohibits
agreements that unreasonably restrain trade, such as
agreements among competitors to fix prices, rig bids or allocate
customers or markets.  Oftentimes, courts can infer such
anticompetitive agreements based on the exchange of competitively
sensitive information among the participants.  Blockchain
participants therefore must be mindful of the heightened antitrust
risks that come into play should the blockchain arrangement involve
the sharing of competitively sensitive information, such as
pricing, costs, output or customer specific information.

To minimize this antitrust risk, particularly in a blockchain
consortium involving competitors, participants should either avoid
the exchange of competitively sensitive information altogether or
narrowly tailor the information exchanged and adopt other
appropriate safeguards where reasonable. Safeguards to consider
include setting up permissions so that only intended recipients of
data have access to a block of information and adopting read
permission restrictions to prevent employees who have
responsibility over pricing, marketing, strategy and competitively
important strategic decisions from accessing competitively
sensitive information shared on the blockchain.  Aggregating
or anonymizing sensitive data or limiting the information exchange
to historical information only (instead of current or future data)
could also minimize the antitrust risks associated with any
information exchange that is necessary to the blockchain
arrangement. In any event, participants in a blockchain arrangement
should be prepared to articulate why the participants need to
exchange the specified type or level of information to achieve
pro-competitive benefits of the blockchain arrangement.

Consortium blockchain participants may also face antitrust
liability under Section 1 if they reach an agreement to exclude
competitors from the blockchain collaboration where accessing a
blockchain has become essential to doing business in a particular
market or industry. Participants should document and consistently
enforce well-defined and reasonable criteria for membership. 
Participants should also exercise additional caution in restricting
membership if development of the blockchain technology or any
related applications involve standard-setting or the adoption of
standard, essential patents, both of which present unique antitrust
risks.

Relatedly, antitrust scrutiny may also extend to the way in
which consortium members approve transactions.  Nodes (or
members of the supply chain) validate transactions to be added to a
blockchain in accordance with certain pre-determined validation
rules.  Then, nodes only add transactions to a blockchain if
the rules for adding a block to the blockchain are satisfied
(“consensus”).  Antitrust risk can
increase where these consensus mechanisms prioritize clearance of
transactions by certain members or decline to validate transactions
by particular parties without a legitimate and objective basis for
doing so. Participants should ensure the validation and consensus
mechanisms use objective criteria and that no single participant
controls these processes.

In addition to the most prevalent antitrust risks highlighted
above, participants should consider other potential antitrust
complications when forming or participating in a collaboration with
competitors to develop blockchain technology and related
applications.  Participants should be mindful of these risks
and consult antitrust counsel early in the process as they harness
the benefits of blockchain technology to meet their supply chain
needs.

Footnotes

1
The Electronic Signatures in Global and National
Commerce Act (E-Sign Act),
 FDIC Consumer Compliance
Examination Manual – January 2014


Final Act, With Comments: Uniform Electronic
Transactions Act (1999),
 Uniform Law Commission (last
retrieved on September 8, 2021)


Uniform Electronic Transactions Act
(UETA),
 Practical Law (last retrieved July 22,
2021)

4 ARS
§ 44-7061; TN Code § 47-10-202

5Wyoming’s Digital Assets Amendments: Marked
Out or Missed Out? A Review of Recent Amendments to Article 9 of
the Wyoming UCC,
 American Bar Association (October 1,
2019)

6Id.

7
Art. 17 GDPR and Cal. Civ. Code § 1798.105

8 GDPR & Blockchain: At the Intersection of Data
Privacy and Technology,
 BDP (Iast retrieved July 22,
2021)

9 15 U.S.C. § 1

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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