The Electronic Signatures in Global and National Commerce Act ("ESIGN") ¹ , most of which becomes effective on October 1, 2000, marks the latest statutory milestone on the road to a nationally consistent legal framework for electronic commerce. It joins the proposed Uniform Electronic Transactions Act (UETA), versions of which have already been adopted in 18 states (including Pennsylvania and Maryland) with other versions pending in most other states (including New Jersey and Delaware). ² We invite clients to consult us on specific details of these Acts, which can only be outlined in broad strokes in this Update.

ESIGN and UETA apply to transactions among individuals, businesses, and governments; ESIGN only applies to transactions "in or affecting interstate or foreign commerce". Both statutes provide - with numerous exceptions - that electronic contracts, signatures and other transactional records "may not be denied legal effect, validity, or enforceability" solely because they are in electronic form.

What Is An "Electronic Signature"?

An "electronic signature" is 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." As UETA's official comments make clear, "No specific technology need be used ...[T]he critical element is the intention to execute or adopt the sound or symbol or process for the purpose of signing the related record." Consequently a valid "electronic signature" does not need to be an encrypted signature such as those created by PGP or other digital encryption programs. It can be a webpage clickthrough ("I ACCEPT"), a sound ("OK!"), typed letters at the bottom of an email message ("Moi"), a fingerprint, a DNA sequence, or something totally unimaginable today, so long as it is intended as a signature by the signer. Even the act of a nonhuman "electronic agent" empowered by a party may be sufficient to bind the party. However, the more stringent and secure the signing process is, the more difficult it will be for the purported signer to deny or evade responsibility.

Do I Have To Accept Electronic Signing?

Neither ESIGN nor UETA force anyone in the private sector to go electronic. It is up to the parties to decide how to transact their business. Section 101(b)(2) of ESIGN states, "This title does not ... require any person to agree to use or accept electronic records or electronic signatures ... " iii UETA similarly says, "This Act applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. "

What Is An Electronic Record?

An electronic record is "a contract or other record created, generated, sent, communicated, received, or stored by electronic means." "Electronic" means "relating to technology having electrical, digital, wireless, optical, electromagnetic, or similar capabilities." This means that an "electronic record" is essentially any record created, used, or stored in a medium other than paper. "[I]nformation stored on a computer hard drive or floppy disc, facsimiles, voice mail messages, messages on a telephone answering machine, audio and video tape recordings, among other records, all would be electronic records under this Act." Looking ahead to the molecular computers of the future, even biological and chemical processes may be "electronic".

What Implications Does ESIGN Have For Recordkeeping?

Under § 101(d) of ESIGN, which generally does not become effective until March 1, 2001, if a federal or state law or regulation imposes a recordkeeping requirement with respect to a covered transaction, "that requirement is met by retaining an electronic record of the information ... that (A) accurately reflects the information set forth in the [original] record; and (B) remains accessible to all persons who are entitled to access . . . for the [required] period ... in a form that is capable of being accurately reproduced for later reference . . ." This provision applies even if the statute or regulation purports to require retention of the "original", which could make a substantial difference in companies' recordkeeping practices created in response to past governmental requirements. The "accuracy" requirement, however, presents a variety of authentication and security issues which will require careful planning before roomfuls of paper records go to the shredder.

What Exceptions Exist?

As with many statutes crafted through political compromise, ESIGN is riddled with exceptions and special provisions, only a subset of which can be addressed in this Update. Similar exceptions, and others, exist in many state versions of UETA. The principal exceptions to the primary section of ESIGN are:

• Documents governed by estate and family-law statutes and regulations, such as wills and trusts, and adoption, custody, or divorce papers.
  
  
• Documents governed by the Uniform Commercial Code (other than the Code articles governing sales and leases), i.e., commercial paper, negotiable instruments, security agreements, etc. As noted below, however, Title II establishes a specific set of criteria for "transferable notes" relating to loans secured by real property.
  
  
• Court documents.
  
  
• Notices of utility shutoffs, mortgage defaults and foreclosures, cancellation of health/life insurance benefits, product recalls, and similar communications from hardhearted companies to consumers.
  
  
• Hazardous waste manifests and similar documents.

In addition, § 101(c) imposes extensive additional consent requirements in consumer transactions. If a law requires that certain information be provided to a consumer in writing (e.g. the Magnuson-Moss Warranty Act or state consumer protection statutes), an electronic substitute is allowed only if the consumer expressly consents after receiving a conspicuous disclosure satisfying the detailed requirements of § 101(c)(1).

What Provisions Apply To Mortgage Notes?

Title II of ESIGN, also effective October 1, 2000, specifically addresses "transferable records".iii A "transferable record" is an electronic promissory note relating to a loan secured by real property, whose issuer has expressly agreed that it is a transferable record. Section 201(c) imposes more stringent technical requirements than the basic Act to protect the integrity of these negotiable instruments: there must be a "single authoritative copy" which is "unique, identifiable, and... unalterable", and which uniquely identifies the single holder of the "authoritative copy". The person in control of that copy is the UCC "holder", potentially a "holder in due course", with associated rights and defenses.

Conclusion

ESIGN and UETA should eliminate much of the legal uncertainty which currently hampers the use of electronic signatures and records, but their full value will not be realized until the technology and infrastructure for creating and authenticating digital signatures becomes more standardized and easier to use. In the meantime, however, clients should be considering how these technologies can - and should - expand the ways they do business. Saul Ewing lawyers would be happy to assist in structuring websites, transactions, and agreements to meet the requirements of these new laws.

This Update was prepared by Scott D. Patterson, Esq., a partner in Saul Ewing's Business and Litigation Departments and the Intellectual Property Group. Mr. Patterson can be contacted at (610) 251-5050 or spatterson@saul.com.

The statements contained in this Update are intended for general information and do not constitute legal advice.

FOOTNOTES:

1. Public Law 106-229, June 30, 2000. See http://thomas.loc.gov/cgi-bin/query/z?c106:S.761.ENR:
2. UETA is a template proposed by the National Conference of Commissioners on Uniform State Laws; it has no legal effect unless and until adopted in some form in a given state. ESIGN is essentially a federal version of UETA, and in fact contains a provision that defers to state enactments of UETA which are not inconsistent, ESIGN § 102(a).