August 2000
by Richard Raysman
and
Peter Brown
IN LESS THAN a decade, the Internet has revolutionized the way people communicate and conduct business. Paper documents and "snail mail," once the lifeblood of commerce, have given way to electronic documents and e-mail. Americans are getting their news, stock quotes, and many of their goods and services from the Internet. For example, last year consumer spending online during the holiday season totaled over $5 billion.
Until recently, state laws did not give many contracts executed electronically the same legal effect and enforceability as paper contracts. Now, however, the Electronic Signatures in Global and National Commerce Act (E-Sign Act), passed by Congress in June and signed into law on June 30, 2000, eliminates paper requirements in a variety of interstate business, commercial, and consumer transactions--moving us further from the paper age to the digital age. The E-Sign Act validates most types of electronic contracts and transactions by allowing the signatures, records, and notices associated with these contracts to be maintained in a digital form. Most provisions of the law take effect on October 1, 2000.
In passing the E-Sign Act, Congress intended to preempt state laws, such as New York's Electronic Signatures and Records Act (ESRA), to the extent that the New York statute might be interpreted to be inconsistent with the Federal statute. The E-Sign Act puts in place an interim national standard for the acceptance of electronic signatures and records until all states adopt laws based on the Uniform Electronic Transactions Act (UETA). UETA is model legislation, recommended by the National Conference of Commissioners on Uniform State Law (NCCUSL) for adoption by all state legislatures.
E-Sign Act's Preemption of ESRA
Under E-Sign ß102(a)(1), if a state has enacted UETA as approved and recommended by NCCUSL in 1999, E-Sign will not preempt that state's law. The state law will continue to govern. Because ESRA, New York's Electronic Signatures Act, is not a uniform enactment of UETA, the question then arises whether E-Sign preempts ESRA and to what degree.
An examination of E-Sign ß102 indicates that the Act intends to preempt only those ESRA provisions that (i) are not consistent with Titles I and II of the E-Sign Act, or (ii) violate the E-Sign Act's "technology neutral" mandate. Consistent, technology neutral ESRA provisions presumably would survive.
One way in which E-Sign preempts ESRA is with respect to the amount of freedom each act gives parties to determine the technologies to be used in the execution of an electronic contract. The Federal legislation grants all parties to a transaction complete freedom to determine the technologies to be used in the execution of an electronic contract.
Under E-Sign, an electronic signature cannot be denied validity if it is "an electronic sound, symbol, or process, attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record." This lowest- common- denominator definition of electronic signature, soon to be the law nationwide, imposes no requirements with respect to technological means to verify the authenticity of an electronic signature. Under E-Sign, as with paper documents, a presumptively valid signature could be as simple as an "X" on the signature line of an electronic contract or as technologically advanced as a DNA scan.
Minimum Standards
Concerns about the authenticity and security of electronic documents had previously led some states, including New York, to give presumptive legal validity only to those electronic signatures that met certain minimum technological standards for ensuring authenticity. Under the New York statute, a valid electronic signature must be an electronic identifier, including without limitation a digital signature, which is unique to the person using it, capable of verification, under the sole control of the person using it, attached to or associated with data in such a manner that authenticates the attachment of the signature to particular data and the integrity of the data transmitted, and intended by the party using it to have the same force and effect as the use of a signature affixed by hand.
Reflected in the New York definition is the concern that electronic signatures and documents are more difficult to verify than paper documents with respect to whether: the party to be charged under the contract intended to authenticate the document; the individual to be charged is actually the person who made the agreement; and the contract itself is the very contract that a party thought it was signing, or whether it has been altered in some way.
The E-Sign Act does not define how online transactions will take place. Parties involved in a transaction are free to choose the authentication technologies they consider appropriate for their transactions. By ensuring that state laws do not require, or give greater legal status or effect to the use or application of a specific technology or technological specification, E-Sign advances three legislative goals:
(i) to ensure a uniform nationwide standard of legal certainty for electronic signatures;
(ii) to give consumers and businesses the freedom to select the technology that is most appropriate for their particular needs, taking into account the importance of the transaction and its corresponding need for assurance; and
(iii) to encourage technological innovation by not granting a legal presumption of reliability to any one type of technology or software business, as many states did when they granted a legal presumption of authenticity to digital signature technology.
Effect on Consumer Transactions
Under ESRA, specific statutory authorization already exists in New York for the validity and enforceability of contracts made online. The E-Sign Act reaffirms those provisions. The E-Sign Act's real impact in New York will be to increase the number of kinds of contracts that can be made on-line, and to make simpler and less expensive the execution of these contracts.
With respect to the ease with which contracts can now be made on-line, the E-Sign Act preempts ESRA's minimum reliability requirements for electronic signatures and documents. One of the reasons E-Sign was enacted was to meet the needs of the financial services industry, which increasingly makes use of electronic documents and communications. Banks, insurance companies, and securities firms sought technology neutral laws that would decrease the costs of conducting transactions online. In addition, these industries sought nationwide uniformity in electronic signature laws in order to reduce the risk of conducting business online. With greater certainty that online contracts will be enforced in all fifty states, financial companies now will feel more secure in engaging in more numerous and more lucrative on-line transactions.
Software companies also lobbied for the new legislation. Should Internet commerce expand as a result of the new legislation, software companies stand to gain from the increased need for the software that will be needed to facilitate the new online transactions. Software firms should also benefit as a result of the E-Sign Act's requirement that state electronic signature laws be technology neutral. Congress's extension to all signatures of the legal presumption of reliability that some states had granted to only certain types of technology and certain software businesses will most likely make the electronic signature market more competitive.
Internet service providers, credit card companies, and delivery services also lobbied for E-Sign and stand to benefit from an increase in Internet commerce.
Consumer Protections
The E-Sign Act provides consumer protections in three separate ways: the Act's savings clause (ß101(b)(1)), consumer consent requirements (ßß101(b)(2) and 101(c)), and specific exceptions (ß103).
The Savings Clause
The E-Sign Act's savings clause (ß101(b)(1)) essentially provides that the consumer protection laws of every state will not be preempted. As a result, New York State laws, regulations, and common law rules that prohibit fraud, unfair trade or deceptive practices, or unconscionable contracts are not affected by this act.
Consent Requirements
Under the E-Sign Act's strong consumer consent requirements, the use or acceptance of electronic records or signatures is entirely voluntary, as was the case under ESRA. No contracting party, other than a government agency, may be required to use or accept electronic records and electronic signatures in transactions (ß101(b)(2)). Such provisions are designed to ensure that those who do not have access to computers or prefer written forms will not be left unaware when a company electronically serves notice on such matters as warranties, changes in interest rates or recalls.
As further protection for consumers under ß101(c), E-Sign contains a number of consent requirements. Under the new law, if a state law requires businesses to provide consumers certain information in writing, businesses may provide such information electronically only after a consumer has consented to receive the information electronically and has demonstrated the ability to receive such information electronically. In order for consent to be valid, there must be some reasonable demonstration that the consumer has the software and hardware necessary to read and save the electronic record and can actually access and retain the record. This one-time "electronic check'' can be as simple as an e-mail response from a consumer that confirms that the consumer can access electronic records in the specified formats.
When giving consent to do a transaction electronically, before a consent can be valid, a consumer must be informed of the right to receive records in paper, and of the right to withdraw the consent once given. Consumers must be informed of whether the consent applies only to the initial transaction or to identified categories of records that follow the initial transaction.
As a further protection, the E-Sign Act provides that a consumer may withdraw a consent to receive required notices under a contract in the event the provider changes the hardware or software in a manner that prevents the consumer from accessing and retaining the documents, without costs and fees.
Consumer Exceptions
As a further protection for consumers, the E-Sign Act enumerates several exceptions from the general rule that documents required to be in writing may also be recorded electronically (ß103). The exception of these documents reflects a concern that electronic communication, e-mail, is not as reliable or as ubiquitous as traditional first class mail. These exceptions, some of which overlap with ESRA's exceptions, ensure that these documents continue to be provided and retained on paper. Those exceptions that existed under ESRA included contracts and records related to:
(i) wills, codicils, and testamentary trusts; and
(ii) any conveyance or other instrument recordable under Article 9 of the Real Property Law (for example, a deed).
New exceptions under the E-Sign Act include contracts and records related to:
(i) adoption, divorce, and other matters of family law;
(ii) court orders or notices, and official court documents, including briefs and pleadings;
(iii) notices of cancellation of utility services;
(iv) notices regarding credit and rental agreements for an individual's primary residence;
(v) notices of cancellation or termination of health or life insurance;
(vi) notices of recall; and
(vii) documents required to accompany the transportation of hazardous materials.
E-Sign ß103(a)(3) specifically excepts Articles 3 through 9 of the Uniform Commercial Code, as enacted in any state, from the general rule that documents required to be in writing may also be recorded electronically. Thus, E-Sign does not affect the checking system, paper-based negotiable instruments, or rules governing letters of credit or investment securities.
Signature Technologies
The market for electronic signature products is highly competitive, and no one can predict which methods will ultimately predominate. The E-Sign Act adopts a free-market approach. The act aims to give consumers and businesses the freedom to select the technology that is most appropriate for their particular needs, taking into account the importance of the transaction and its corresponding need for assurance.
The various technical approaches to electronic document authentication provide varying levels of assurance as to whether:
(i) the signer understood that he was binding himself to the terms of the document;
(ii) a reliable record of the signing event exists showing who the signer was, which document he thought he was signing, and what he intended for his signature to mean;
(iii) the entire document with signature can be given to and stored by both parties, and has not been altered in any way.
Combining Approaches
Among the various technological approaches, in an ascending level of assurance, are
(i) "shared secrets'' methods (e.g., personal identification numbers, credit card numbers, and passwords): these methods provide the minimum level of security and authenticity of signature or record;
(ii) digitized manual signatures or biometric means of identification, such as fingerprints, retinal patterns, face scans, and voice recognition; and
(iii) cryptographic digital signatures (often with private keys stored on Smart Cards); these methods provide the best assurance that the electronic record was signed by the party whose digital signature is attached and the electronic contract was not altered after it was signed.
Combinations of approaches (e.g., digital signatures with biometrics) are also possible and may provide even higher levels of assurance.
This article is reprinted with permission from the August 8, 2000 edition of New York Law Journal. © 2000 NLP IP Company.
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