• E-Sign: Three Things You Need to Know if You Do Business on the Internet
  • May 6, 2003
  • Law Firm: Miller Nash LLP - Portland Office
  • The Electronic Signatures in Global and National Commerce Act (15 USC § 7001 et seq.) ("E-SIGN") went into effect on October 1, 2000. E-SIGN eliminates all state, local, and other barriers to conducting business electronically and validates the use of "electronic signatures" in commerce. E-SIGN is one more step in a centuries-old march to preserve parties' freedom to contract, while simultaneously protecting against fraud.

    More than three centuries ago, England -- experiencing an explosion in literacy because of the earlier invention of the printing press -- enacted the first statute of frauds, which required certain classes of important contracts to be made in writing and signed. That statute was subsequently enacted in the colonies and continues to exist today in most of the United States. In the spirit of that centuries-old tradition requiring important documents to be "in writing" and "signed," E-SIGN simply continues that admirable precept in a new form.

    1. E-SIGN applies to almost all commercial e-mail or Internet transactions.
    E-SIGN's broadly worded definitions show Congress's intent to adapt this act to any paperless transaction. E-SIGN defines "electronic" as technology "having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities." Using that broad definition, E-SIGN goes on to define an "electronic signature" as "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." Such electronic signatures can now replace the traditional "John Hancock" in signing a contract or record.

    As with most basic contract law, the intent of the parties is paramount. Hence, an e-mail containing no mark clearly fitting within Webster's definition of a "signature" but nonetheless sent with an obvious intent to accept the recipient's offer should be sufficient to form a contract and close a deal. The same e-mail sent without that intent may not suffice. Because of that ambiguity regarding intent, businesses that are moving their transactions on-line would be wise to require something more than just a reply e-mail to close the deal. Such indicia could include credit card numbers, account information, "smart" cards (preapproved by the owner as providing a valid electronic signature), or something as simple as a user ID and password.

    E-SIGN mandates that electronic records will be given the same effect as if they were original pieces of paper, as long as the electronic record accurately reflects the information in the original record, remains accessible, and can be accurately reproduced. While Congress has put its explicit stamp of approval on reducing your file cabinets to a CD-ROM or hard drive, it has also put in an important proviso regarding the technology you use to access that record. Any contract or record may be rendered unenforceable or unusable if it cannot be readily obtained and accurately reproduced for later reference. This means, for instance, that if a person created a contract and saved it in WordPerfect, then later changed the word processing systems to Microsoft Word and failed to retain a copy of the earlier program, he or she might have trouble enforcing that contract because he or she cannot retrieve it (or cannot retrieve it accurately). Nonetheless, even without E-SIGN, the outcome would be similar, since a failure to produce the contract being sued on is a formidable obstacle to victory.

    E-SIGN does not require that anyone agree to do business electronically. Indeed, E-SIGN generally does not apply to documents or transactions involving wills, trusts, family law, notices of foreclosure, notices of insurance cancellation, hazardous materials, and most Uniform Commercial Code transactions (although it does apply to Article 2 sales and Article 2A leases). Further, as explained below, its consumer provisions require affirmative indicia that the consumer actually wants to do business electronically. Thus, while E-SIGN opens the door to paperless transactions, it does not force anyone to cross that threshold. People will continue to do business as they already do¿in both paper and electronic formats.

    2. Businesses must take extra precautions with electronic consumer transactions.
    E-SIGN contains a number of procedural and substantive protections for consumers. While E-SIGN has a laissez-faire attitude toward business-to-business transactions, it has very specific provisions regarding the disclosures that must be made to effectively do business with a consumer via e-mail or over the Internet. If part of your business includes Internet consumer transactions, you must do the following:

    (a) Obtain the consumer's affirmative consent to conduct business electronically;

    (b) Prior to receiving that consent, provide the consumer with a "clear and conspicuous statement" of the consumer's right to receive a paper record and to withdraw consent, along with an explanation of the procedures for withdrawing consent or changing contact information and of the scope of the consent;

    (c) Prior to receiving consent, give the consumer a statement of the hardware and software requirements necessary to engage in the transaction, and inform the consumer that he or she must show capability of engaging in such transactions by consenting electronically.

    Even after such consent is received, you must monitor any changes in your hardware or software requirements that may create a material risk that the consumer will be denied access. If such a technology change may impair consumer access, you must (1) provide a new statement of those changed requirements, (2) inform the consumer of his or her right to withdraw consent without any fees or penalties, and (3) once again obtain the consumer's electronic consent. Failure to follow such steps could void any future electronic transactions because the consumer is vested with the absolute discretion to treat such failure as a retroactive withdrawal of the consumer's consent. Especially for businesses that hope to engender a long-term, recurring, consumer relationship¿such as credit card companies or stockbrokers¿this latter provision is important. The notification burden should cause institutions to think carefully about changing software or hardware because change (1) may require blanket notification to customers and (2) may render voidable future potential transactions with consumers whose computers cannot accommodate or sync with the business's new technological requirements. (Companies may want to shift the liability for the effects of such changes by insisting on warranties from their hardware and software vendors that any new system will be compatible with the technological limitations of the existing customer base.)

    3. E-SIGN replaces any conflicting state laws.
    Congress's intent was to enact a uniform statute laying out basic requirements for electronic transactions and bring uniformity to the patchwork quilt of existing state laws governing the same subject. Thus, with very few exceptions, state laws governing the same subject matter are rendered null and void. Indeed, Washington State's Electronic Authentication Act (RCW ch 19.34), with its narrower definition of "electronic signature," has probably been preempted by E-SIGN. Thus, in conducting your business over the Internet, E-SIGN should be the first place you look for guidance.

    Doing business electronically is a natural evolution of business transactions. Just as the invention of the printing press led England to enact the first statute of frauds more than three centuries ago, E-SIGN preserves parties' contractual freedom while protecting against fraud. While file cabinets are not yet obsolete and computers have not yet replaced the ubiquitous pen, E-SIGN is the first step into what should become a more paper-free world.