Federal Electronic Signature Legislation Summary

The Electronic Signatures in Global and National Commerce Act (E-SIGN)[1] (the "Act"), signed into law by the President on June 30, 2000, marks the federal government's first step in enabling the use of electronic signatures in interstate and foreign commerce. With the Act, the United States joins a growing list of nations, such as Hong Kong and Singapore, that have enacted electronic signatures legislation. This client update will review the applicability and exceptions to the Act.

What are "electronic signatures"?

The notion of a signature is well founded and the law surrounding the sufficiency and necessity of a signature is similarly situated. The common law notion called the "Statute of Frauds" generally requires a signature to enforce a contract for the sale goods, transfers of real property, and testamentary dispositions. Similarly, the Uniform Commercial Code ("UCC") has long held that for transactions in goods above $500 a written signature is required. The same also is true of assignment in intellectual property and security interests.

A "signature" has long been understood in the commercial and consumer context as including "any symbol executed or adopted by a party with present intention to authenticate a writing." Such a definition is sufficient when applied to the physical world since a signature was typically affixed to "writing." In the electronic environment, a signature is far more easily copied and transposed from one document to another. Thus, the challenge has been to formulate a proper definition of an electronic signature and a method whereby a "signed" document could be deemed to be at least as trustworthy as its physical counterpart.

Two schools of thought have rapidly emerged to meet the challenge: digital signatures and digital signatures. A "digital signature" is an electronic identifier that utilizes an information security measure, most commonly cryptography, to ensure the integrity, authenticity, confidentiality and nonrepudiation of the information to which it corresponds.[2] The most common form of digital signatures utilizes asymmetric cryptography in which two encryption keys are created. One key has the ability to encrypt and the other the ability to decrypt, but neither key can do both for any given message. Several states including Minnesota, Utah and Washington have followed this definition and shaped their recognition of electronic contracting practices.

The more common approach among the states has been to recognize "electronic signatures". One common definition given to "electronic signature" is any identifiers such as letters, characters, or symbols, manifested by electronic or similar means, executed or adopted by a party to a transaction with an intent to authenticate a writing. A writing, therefore, is deemed to be electronically signed if an electronic signature is logically associated with such writing.

Congress elected to enable "electronic signatures" over the technically-oriented and narrow "digital signatures" only. Under the Act, an "electronic signature" is defined by the Act to mean "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." This broad definition encompasses digital signatures as well as many other electronic methods of "signing" contracts, including smart cards containing digital signatures, PIN applications, and biometrics.

General Rule of Applicability

The Act was drafted to broadly enable the use of electronic signatures and electronic contracts based on a two-part legal principle: (i) a signature, contract or related transactional record may not be denied legal effect, validity or enforceability solely because it is in electronic form; and (ii) a contract may not be denied legal effect, enforceability or validity solely because an electronic signature was used in its formation. This general rule of applicability provides that signatures or contracts are not to be denied legal effect solely because of their electronic form; an electronic contract or signature still may be invalid for other reasons.

The Act applies to a broad range of transactions, from online "business to consumer" transactions to real property transactions. The Act enables "agent to agent" transactions, wherein electronic agents may transact with each other on behalf of their respective principals, so long as such transactions are legally attributable to the principal. Further, the Act allows for the formation of insurance contracts, and an insurance broker or agent will not be held liable for any deficiencies in the electronic procedures if the agent or broker is not negligent or reckless and follows proper electronic procedures used in contract formation. Notarization is now possible with an electronic signature if the requirements of the statute requiring notarization are satisfied.

Exceptions

By definition, the Act applies only to transactions in interstate and foreign commerce and therefore does not apply to intrastate transactions.[3] In addition, other than acceptance of third-party contracts/records by a government agency, the bill does not require any person to agree to use or accept electronic signatures or records. The Act also does not apply to: (i) the formation of wills, codicils or testamentary trusts; (ii) state statutes governing adoption, divorce or family law matters; (iii) the Uniform Commercial Code (the "Code") in effect in any state, except for Code sections 1-107, 1-206, and Articles 2 and 2A; (iv) court orders and other official court documents; and certain other documents, and (v) notices for termination of utility services, credit agreements secured for a primary residence, cancellation of insurance, or product recalls. The UCC exception essentially means that, in the commercial context, the Act only applies to the sale of goods -- other transactions governed by the UCC, such as the perfection of security interest and commercial paper transfers, are excluded.

Consumer Consent

The Act and usage of electronic signatures and electronic contracts are not self-executing. A consumer must explicitly consent to the use of electronic signatures and electronic contracts. The consumer's consent must be either made or confirmed electronically in a manner that reasonably demonstrates that the consumer can access information in electronic form.

In order to give a valid consent, the consumer must be provided with a "clear and conspicuous statement" of: (i) any option to have the record provided in non-electronic form; (ii) how the consumer can obtain a non-electronic copy of the records and any associated fees; (iii) the right to withdraw the consent, and any associated conditions and fees; (iv) a description of the procedures to withdraw consent; and (v) whether the consent applies to a specific transaction or a category of transactions.

In addition, consumers must be informed of the software and hardware required for access and retention of the electronic records. Consumers are afforded the right to withdraw their consent without charge, condition or penalty in the event of a material change in hardware and software requirements, and failure to provide notice of changed software and hardware requirements shall be treated as a withdrawal of the consumer's consent.

Records Retention

If a statute, regulation, or other rule of law requires records retention in connection with an international or interstate transaction, such records may be retained electronically as long as the electronic record is accurate and remains accessible and reproducible. The legal effect of an underlying contract may be denied if such electronic record is not capable of being retained and accurately reproduced. This electronic records retention rule also applies to the retention of statutorily-defined originals, as well as retention of checks. However, the electronic records retention rule is not applicable to any information whose sole purpose is to enable the contract to be sent, communicated, or received.

Preemption of Conflicting State Laws

The fundamental premise of the Act is that the global electronic marketplace requires uniform rules for the means of making contracts, which would be undermined if states adopted laws that imposed inconsistent rules or conflicted with the Act. To preserve marketplace certainty that electronic signatures and electronic contracts will be valid, the Act includes a limited preemption of state laws on the same subject.

The Act is modeled closely on the Uniform Electronic Transactions Act (UETA), which was recommended to the 50 states in July 1999. Congress intended the Act to fill the gaps between states enacting UETA, so that uniformity and certainty could be achieved without waiting for all 50 state legislatures to act.

Congress provided that states may adopt laws that modify the Act's provisions only under certain circumstances. The first is if such modification comes as part of the adoption of UETA as it was recommended (this prevents states from making substantial modifications to UETA that undermine its purpose of uniformity). A state that adopts UETA may not circumvent the Act by adding additional requirements that certain contracts require non-electronic documents for their formation. Second, states may modify the Act's rules if the modification specifies an alternative procedure for the use and acceptance of electronic records in contract formation. In this case, the alternative must be consistent with the Act and must not favor a specific technology.

Given the complexity of state and federal laws on matters covered by UETA and the Act, the full scope of preemption is not completely clear at this juncture. Further judicial and legislative clarification is anticipated.

Federal and State Document Regulations

The Act requires that government agencies are required to accept third-party contracts/records unless they are a party to such contract or record. However, the Act does not affect the standards and format of the records to be filed with a governmental agency. In addition, the Act also limits the ability of government agencies to impose new non-electronic filing requirements.

Mortgage Notes

The Act includes a narrow provision dealing with promissory notes in electronic form. The effect of the Act is to permit mortgage loans to be documented and transferred electronically, without a paper note signed by the borrower.

An electronic note may be transferable if: (i) it would satisfy the requirements of Article 3 of the Uniform Commercial Code if it were in writing, (ii) the issuer of the note agrees that it is a transferable electronic record, and (iii) the note relates to a loan secured by real property. In order for an electronic note to be used, it must have a single authoritative copy that is identifiable as such and is unalterable. If the conditions are satisfied, an electronic note confers the same rights and obligations as its paper counterpart.

International Cooperation

The Act directs the Secretary of Commerce promote the acceptance and use of electronic signatures on an international basis, the goal of which is facilitate acceptance of electronic contracts and electronic signatures. The Secretary is to promote the United Nations Commission on International Trade Law's Model Law on Electronic Commerce, with (i) local rules on authentication technologies and implementation models; (ii) ensuring court review of such transactions; (iii) and a nondiscriminatory approach to electronic signatures and authentication methods from other jurisdictions.



[1] Public Law 106-229 (2000).

[2] A common definition for digital signatures may be found in the Utah Digital Signature Act, Utah Code  45-3-103(10):

"Digital signature" means a transformation of a message using an asymmetric cryptosystem such that a person having the initial message and the signer's public key can accurately determine whether:

(a) the transformation was created using the private key that corresponds to the signer's public key; and

(b) the message has been altered since the transformation was made.

[3] However, given the broad interpretation of what constitutes interstate commerce, especially in view of the Internet, the Act will generally define a floor for electronic authentication.